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Feb 24, 2014

Don’t invest in stocks if you don’t have these

Lately, I've been getting a lot of queries about investing in the stock  market.  It’s probably because the Philippine stock market has been  hitting record highs this year.  You can hear many economists and financial experts declare that now is a good time to invest in stocks and equity funds.  Yes, it is indeed a good time. 

But before you jump into the stock investing bandwagon there are several things you need to prioritize first as smart investors do.  Don’t even think of investing your money in stocks, mutual funds or UITFs until you have these three important financial safeguards.

This is standby money that you can use in case a financial emergency arises like your child getting sick or injured and have to be rushed to the hospital.  Financial emergencies also include unexpected and unfortunate events like losing your job, death of a family member and emergency home or car repairs.   What will you use if there’s a financial emergency and most, if not all of your money is invested in the stock market or in funds?  Since it takes several days before you can get your money out you will probably end up borrowing and may have to pay high interest rates.  

Also, if you are forced to pull out your money when the market is down then you may suffer a substantial loss.  The PSE index on May 15 was close to 7,400.  By June 25 it was down to 5,860, a 21% drop in just six weeks.  If you invested P100,000 in the stock market in May and you had to use the money in June for an emergency then you would have potentially lost about P21,000.

The ideal amount of emergency fund is equivalent to 3-6 months your monthly expenses; higher if your income is not regular (for example, you earn from sales commissions).  Until you have this amount of emergency fund don’t invest in the stock market and in funds with high levels of risk like equity funds.  Your emergency fund (or a big chunk of it) should be available at all times and ought to be put in a “safer” place like a savings account with an ATM card.

If you are the main income earner in the family or people depend on you financially, you cannot go on with life without adequate life insurance coverage.  Investments in the stock market and high risk funds are not a good form of income protection unless you already have millions invested.   Think about this.  You have P50,000 cash available and rather than buying life insurance you decided to put it all in the stock market because it’s doing really well.  Before the year ends God calls you home.  How will your family live in the next two to five years?  What will happen to your children’s education?  Will your P50,000 stock investment be enough for them to live by? 

Should you prioritize investing in stocks over getting life insurance coverage then pray a lot more and hope that you don’t meet an untimely demise.  Because it will take you a long time to accumulate enough money in stocks to cover your family’s financial needs when you are no longer around.  A P100,000 stock investment will take more than 20 years to reach P1 million if it grows 12% annually.  On the other hand, half of this amount can already buy you millions in life insurance coverage and you get protected right away.

If you don’t have life insurance and still want to take advantage of the stock market’s good run you can consider buying investment-linked life insurance policies, commonly known as VULs or ULPs.  It’s a 2-in-1 policy that provides life insurance coverage and an investment feature that grows your money.

This is an equally important policy to have.  Before your time is finally up you will probably get seriously ill or injured at least once in your life.  Without ample protection provided by a medical or health insurance plan your family can suffer a lifetime of financial difficulties if you catch a critical illness like cancer or stroke.  No, your Philhealth coverage is simply not enough.

Your stock investments may possibly cover the cost of treating a sickness or injury that hits you or another family member.  But why pay for it in full when you can let another company shoulder it for you for just a fraction of the cost.  Would you really want to use up your P100,000 stock investment to pay for a medical crisis rather than spend a much smaller amount to buy adequate medical insurance which can cover the costs?  A smart investor would know the right answer.

Alvin T. Tabañag is a personal money management coach and registered financial planner.  He is a member of the US-based Registered Financial Planners Institute, the Financial Planning Association (USA) and the Association of Registered Financial Planners of the Philippines.  

He is also a member of the Professional Speakers Association of the Philippines.  He is the founder of Pinoy Smart Savers Learning Center, an internationally-recognized organization and “Best Provider” of employee financial education in the Philippines.  Mr. Tabañag’s center is at the forefront of a campaign to promote a culture of saving and responsible money management among Filipinos.

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