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OT: Financial planning

Discussion in 'Band of Glockers' started by mikey177, Jan 14, 2005.

  1. mikey177

    mikey177 Remember

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    Well, I'm not getting any younger, and after reading some material from Robert Kiyosaki (Rich Dad, Poor Dad) and Francisco Colayco, I have been doing more in-depth research on preparing for my inevitable retirement.

    I would just like to ask antediluvianist and our other financial gurus about how Treasury Bonds work, and how to make sure the investor gets the best possible deal when purchasing this security from a licensed dealer.

    Is it safe to assume that longer term T-Bonds (say, 20 year bonds) will have a higher yield than shorter term Bonds?
     
  2. mikol

    mikol

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    hi mikey,

    i don't have any idea about t-bonds but for sure i would agree to mr. colayco's way of "paying yourself 20% of your monthly income" is good enough for me ;f ;z
    this will be for my savings and it will also be my financial source of any future business or investments. :)
     

  3. mikey177

    mikey177 Remember

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    Yes, mikol. Pay yourself first is a savings strategy that should be taught and practiced even at the elementary school level. If I had known this when I started working over 10 years ago, I would probably have more real assets right now.

    That's why I'm doing double time, and I've started to save not just 20, but 30 percent of my income every month because when I retire, I still want to be able to shoot and buy new guns every so often :)
     
  4. mikol

    mikol

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    same here mikey, if i had started it earlier i might got a lot of dough by now. But it's really never to late to start doing it.;f And your right not just 20% but we can pay ourselves more than that. so that we can still afford to buy more guns in the near future.:cool:;) (well it's really for our kids future but nevertheless we can still include in the savings our hobby ;I)
     
  5. Allegra

    Allegra

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    hehe It really was a good book wasnt it ( Colayco's )
    Pretty easy to understand, gave a few last xmas
    I dont have a problem with the saving. I'm pretty much kuripot :)
    I've been in business for a decade na, ngayon lang ako gumawa ng personal SAL.

    Other books you might like:
    The Millionaire Next Door ( Kuripots rule !! )
    Donald Trump : The Art of the Deal
     
  6. mikol

    mikol

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    thanks bro for the reference ;z
     
  7. SMBeerDealer

    SMBeerDealer Member

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    Hi guys. I underwent a financial management seminar under Topax Colayco a few months back. With him was Noli de Pala, an international financial planner/adviser from HSBC. Just like to add that they both emphasized the fact that it's not whether you put your money in bonds, t-bills, securities, dollar deposits, etc, it's a combination of all of these and the ratio of each should be according to your financial goals. Do you want to be liquid? Want your money to just grow? What'll you use your money for? Indeed, everyone should start letting your money work for you. Just wanted to share with everyone what little I know. :)
     
  8. mikey177

    mikey177 Remember

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    Thanks for the input, SMBeerDealer. Of course I wasn't going to limit my investments to just T-bills or T-bonds. I've already got some funds tied up in time deposits, but I just want to know more about Treasury Bonds before sinking money into them. As Colayco said in his book, don't sink money into any investment (whether it be securities, bank deposits, a business, etc.) unless you have carefully studied it and are aware of the risks and returns involved.

    P.S.

    Its too bad most firearms don't appreciate in value over time, otherwise, we could all be rich men when we retire :)
     
  9. Pepe G Boy

    Pepe G Boy

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    Treasury Bonds (2-25 yrs) have a higher yield compared to Treasury Bills (up to one year)because they have a longer tenor. This is to take into account the term of the instrument and the risk that goes with it. These instruments have the least risk because they are issued by the government.

    Agree with SMBDealer, dont put all your eggs in one basket. Its good to diversify taking into account the risks of the instruments (government securities, commercial papers, time deposits, stocks, dollars, etc.)

    Why dont you look at investing some of your hard earned money in mutual funds. These offer you diversification and liquidity. There are mutual funds which invest only in government securities. Ther are some which are diversified in their portfolio(govt securities, stocks, comml papers)
     
  10. mikey177

    mikey177 Remember

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    Thanks, Pepe G Boy. I will also look into mutual funds after I make some more money :)
     
  11. antediluvianist

    antediluvianist

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    Will writemore later not much time now... but on the matter of T-Bills and T-Bonds, Mikey -

    First of all, you have to subtract 20% tax from the nominal rate. Right now, a 1-year T-Bill (most non-finance people put their money in for only 30 or 60 or 90 days and get even less interest) yields about 9%. But that's PRE-TAX. You will get 9% minus 20% tax. In other words, .09 X .8 = 7.2% only.

    Now that 7.2% has to be compared to the inflation rate. Well, for people like us, who buy a lot of imported stuff like gasoline, antibiotics, imported junkfood (pringles, pistachios etc.) ,pizza (all that mozzarella is imported of course), glocks etc., - well , yes for the types of things we consume, I do believe the inflation rate is higher than 7.2% per year.

    So in terms of PURCHASING POWER, you will not be any better off after one year.

    But it's better than putting your money into a Savings account. There you will actually be poorer as the after-tax return is cetainly less than the annual infaltion rate. Still, to get ahead, you need to put your money into other things like shares of stock, finance company-type lending, and other things. (AFPSLAI pays 18% after tax.)More about that later.

    Note also your liquidity requirements. CAN you keep your investment in a 2-10 year T-bond? Won't you need the money to pay for the tuition of your kids, mortgages, etc.? If I tell you now, your salary is doubled, you will feel really good, right? But what if I tell you, However, you will be paid once every ten years. You will feel terrible. That's the difference between liquidity and profitability.

    Seeya. got to go. More later.
     
  12. 9MX

    9MX Rei!

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    hehe, i like this thread. let's wait for ante's part II :)
     
  13. mc_oliver

    mc_oliver

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    How about those new types of insurance where there's cash payback after several years? Okay ba yun?

    Or, how about those highschool or college plans with cash payback that let you avail even if you still don't have kids yet?
     
  14. Pepe G Boy

    Pepe G Boy

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    Agree with ante with regard to the decreasing purchasing power after you've inputted inflation.

    On treasury bonds, most people are afraid to invest in these instruments because of the long maturity. You will only receive the maturity value on the maturity date of the instrument. But, these bonds pay a corresponding interest every 6 months based on the coupon rate/interest rate of the instrument.

    If you really need liquidity, you can easily sell the bonds. There is an aftermarket for government securities.
     
  15. New_comer

    New_comer

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    I'd say investing in real estate would be a better deal. You'd not be as liquid as you like, but land in the metropolis is not getting any cheaper, rent for the most basic studio type pad hovers at 4-5T easy, especially if the site is near commercial centers where there's an abundance of potential renters, low to middle income groups.

    Say a modest lot of 120 sqm could be converted to a 6-door up and down, 20 sqm per floor costing 2.5 - 3 million. Rent those at 6T each, 36T a month. In about six years, you'd get every centavo back, tubo na yung susunod. But of course, location and a significant initial investment are necessary. But imagine the reward: pakatok-katok ka na lang every month ;)
     
  16. antediluvianist

    antediluvianist

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    If you or your wife belong to a Lopez Group company, you can invest in MESALA (Meralco Savings and Loan Association)and make about 15% after tax per annum. Most large companies have an internal S&L Assoc. too. And there is AFPSLAI (Armed Forces and Police Savings and Loan Association Inc.)- at the moment 18% per annum after tax. Use some soldier/policeman's quota if they aren't (that makes you a "rider".)
    I wrote this on another forum "

    "1) at the moment I (I'm a "rider") am getting 18% not 20%. The nterest rate will be adjusted by the AFPSLAI board every year or so as interest rates fluctuate. I used to be earning 21%, now it's 18%. At this time, the U.S. FED is increasing interest rates and eventually the Bangko Sentral ng Pilipinas will have to follow, to keep the differential between US and Phil. interest rates
    as it is. (RP rates are higher of course.) So, chances are the AFPSLAI rate will be increased.

    2) A BIG THING : this AFPSLAI rate - as I said I'm getting 18% right now - is TAX FREE. This is a BIG advantage over putting your money into government T-bills or bank CDs. Putting money there means you would have to pay 20% tax, so the after-tax rate would be the nominal pre-tax rate ( 9% for a maturity of 12 months right now) X 0.8 = 7.2% after tax.

    It's better to look at it this way : express both the AFSLAI rate and the T-bill rate on a before-tax basis. That means that the effective BEFORE-tax rate that you earn on an investment in AFPSLAI is 18%/ 0.8 = 22.5%. ****It is this 22.5 %, not 18% , that you should compare to the T-bill rate of 9% (since both 22.5% and 9% are BEFORE-tax.)*** So the return from AFPSLAI is 2.5 times that from a T-bill. A very big difference.

    3) You must also consider RISK. The more Risk, the more Return should be demanded by an investor. Risk and Return are directly related.

    Is the T-bill Risk-free? Practically speaking, yes. Unless the government of the Philippines collapses. Is an investment in AFPSLAI also Risk-free? Well, there is General Garcia and those other Generals who have been shown to be thieves. And the RSBS certainly is bankrupt. But the AFPSLAI seems to be OK. For one thing there are guarantors for each loan (but that's not iron-clad ). I prefer to count on the fact that the soldiers who borrow from AFPSLAI pay back by monthly salary deductions (it's not necessary to run after them, as it sometimes is for credit card borrowers.) Also, the life insurance of the soldier will go to paying off any loan he still has outstanding with AFPSLAI before his beneficiaries get that insurance money (if the soldier-borrower is killed in action or otherwise dies.)So, I consider the risk of lending to AFPSLAI to be quite low, comparable to the sovereign risk of the government of the Philippines' defaulting on a T-bill. (If the risk of AFPSLAI were higher than the risk of putting your money in a T-bill, you would have to demand an even higher rate from AFPSLAI. Same principle as when Fitch/Moody's etc. thinks there is higher risk in Phil. government securites and "downgrades" the Philippines's "credit rating", which means the interest rate that the Philippines must pay on its sovereign debt goes up.

    4) Philippine soldiers work on this principal : "if I can borrow more money now, I will, and never mind how much interest I have to pay". So these guys are happy to borrow up to the hilt - they borrow the maximum that their salaries will cover. Then
    that means they hardly get any current monthly salary at all as much of it - and their salaries are small to begin with - immediately goes to paying off what they have borrowed from AFPSLAI. So, that's one reason why soldiers and policemen engage in "income-producing" activities like extorting money from trucks and motorists at checkpoints, selling bullets, taking bribes from houses of prostitution etc..

    5) I have money in AFPSLAI, but I am not in the military. I use the permitted P2million per person quota of some of these guys. I give the guys 3% just for the use of their quotas - these are guys who don't use their full quotas because they can't, their salaries are too low to qualify for that much of a loan. So, I still get 22.5 - 3 = 19.5% after tax, which beats the hell out of T-bills. So I'm what they call a "rider". There are many, many "riders". Because the AFPSLAI return is so good, at essentially no risk. In fact when the "rebels" and "returnee" Muslims etc. laid down their arms and were absorbed into the AFP, getting into AFPSLAI was one of carrots dangled to them.

    6) But actually I get more- 2% per month tax-free - lending to doctors to finance their purchases of X-ray, sonic etc. equipment. Filipinos have the culture of paying anything for the illness expenses of their loved ones. So the doctors simply raise fees to their patients to pay for the 2% per month financing charges + 2% per month for the finance company through which I lend.

    7) But if you play the stock market well, you make more there. For instance, Holcim cement (HLCM) went from P1.94 last dec. 20, 2004 to P2.95 last January 13, 2005( last thursday). That's a profit of 2.95 - 1.94 = P1.01 per share or in percentage terms 1.01/1.94 = 52% in less than one month. If you annualize that,well let's say that's 52% in a month, so it would be 52% X 12 = 624% on an annual basis,which is the proper comparison to the AFPSLAI rate of 22.5% per annum and the T-bill rate of 7.2% per annum. (The tax and commission charges on the stock transactions are very small- about 1% to 2%only.)
    Of course, that annual rate assumes that you can repeat that profit every month which is not true, but at least you know that you get 52% profit in one month, whereas for AFPSLAI you have to wait a whole year and you get only 22.5%.
    (Of course trading in the stockmarket is much riskier than putting your money in a risk-free fixed-income investment like AFPSLAI or a T-bill, so you SHOULD make a lot more in the stockmarket, otherwise it would make no sense to trade in the stockmarket.)

    Well, I'll stop here this is long enough.
     
  17. antediluvianist

    antediluvianist

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    "On treasury bonds, most people are afraid to invest in these instruments because of the long maturity. You will only receive the maturity value on the maturity date of the instrument. But, these bonds pay a corresponding interest every 6 months based on the coupon rate/interest rate of the instrument.

    If you really need liquidity, you can easily sell the bonds. There is an aftermarket for government securities."

    Yes, but if redemption is made before the maturity date, a pretermination penalty must be paid. Otherwise everyone would sign up for the maximum tenor (as long a life of bond) as is offered, because those usually yield the highest yields, and then preterminate any time they wanted.

    If you put the maturities of the different kinds of bonds on the X-axis (90-day, 1 year, 3-year, 5-year, 10-year etc.) , and then the "yields" (more or less the effective interest rate you get) on the vertical Y-axis, you will - under normal circumstances - get an upwardly-sloping (upwards to the northeast) curve.That's the "Yield Curve". Why does it normally curve upward and to the right ( towards the northeast)? Because, other things being equal, the longer the maturity of a bond, the more risky it is- if I borrow from you and tell you I will repay you tomorrow, you won't be too concerned, you just have to wait one day. But if i tell you i will repay you in 10 years, well, anything could happen in ten years - war, ttremendous inflation that would make the principal of the loan worth nothing, the borrower can run away/die/become a moonie- a lot of things. Now Risk and Return are directly and positively correlated, meaning when there is more risk, more return must be earned. So,generally, the longer the maturity of the bond, the more yield (effective interest rate) it must ofer to get anyone to be willing to invest in it.)

    But, sometimes there are "inverted yield curves", where short term bonds yield more than longer ones. Such a situation usually happens before a recession, for technical reasons that we need not get into.But this has happened in the Philippines a number of times - right before our many recessions. When a short-term bond yields more than a long term bond, Look Out!
     
  18. mikey177

    mikey177 Remember

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    Very good stuff, ante. Thanks. Man, I need to do some more homework, and maybe befriend some PNP personnel :)
     
  19. Valor1

    Valor1 Range Bum

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    The insurance business has also evolved in the last few years. Thanks to CAP, the insurance companies tried to copy the format of the pre-need industry. There are now products where you can park your dollars which in turn earns a higher interest compared to other bank products. The good thing about them is that you can let your money grow for 17 years or less. You don't need to worry about "zero age" for a lower premium. In fact these products doesn't even require a child as beneficiary. This is really a so-called endowment plan of yesterday's insurance. You can also dictate the amount of money you want to invest. Another best thing is you can withdraw or terminate anytime you like. Try to look into insurance, it is also a part of a good financial journey.
     
  20. bass one

    bass one

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    I'm no investor and definitely not an authority when it comes to these things. I just want to share some things I "learned" while talking with financers and bigtime gamblers in the casinos. Here's what they have to say. Their philosophy:

    Investing in stocks is a gamble and takes sometime to reap the harvest (like what Ante has elaborated on). Since it is a gamble, why not just go to a casino wherein every peso has an equivalent of 100% return or more depending on the odds of the game you're playing, PER DEAL? What's more you get to enjoy the game!

    Because it's a game of chance people always look at it as something bad and not worth putting your hard-earned money on. But I have seen people finance their children to college by making casino gambling their career. These are the types who put a limit to their winnings or losses...the "disciplined gamblers." Yes, there are a few.

    Trouble comes in when greed sets in. When one keeps wanting more even if one already has enough. But when is enough enough? That is upto the player. Like what we used to say inside, "We've seen a lot of people leave the casinos rich ... but they used to be multi-millionairs!";f

    Hey! I'm not saying go and gamble. I'm merely stating some facts...:cool: