What is the Importance of Investments? Find Out Here

It may come as a surprise, but a large number of Filipinos don’t invest. Citing results from the 2019 Financial Inclusion Survey by the Bangko Sentral ng Pilipinas (BSP), former BSP Governor Benjamin Diokno said that 75% or 54 million Filipinos don’t have investments.^[1]

That’s a very high number of Filipinos with no insurance, mutual funds, or stock investments. Personal finance experts constantly stress the benefits of investments and their importance in achieving sound financial health and financial freedom. But the majority of Filipinos still hesitate to part with their hard-earned money and put it into investments.

Just what is the importance of investments, and why should you start investing as early as now? Let this article shed light on this matter.

4 Reasons Filipinos Don’t Invest

So why aren’t Filipinos investing? Here are the most common fears and hurdles that affect their investment decisions.

1. They Can’t Afford It

Buying a lot of different stocks in different industries is part of building a balanced portfolio. To do this, you’ll need to invest thousands of pesos, at the very least. Not everybody has this kind of money.

And if you’re looking at stocks, there are a lot of costs involved, like commission fees payable to your trader, VAT on that commission, Philippine Stock Exchange transaction fees, and more.

If you decide to sell your stocks, it’s even more expensive because then you’ll have to pay a sales tax. And if you’re only going to buy a few thousand pesos’ worth of stocks and sell after a few months, all the fees will eat into whatever profit you’ve earned.

2. There’s Not Enough Investment Knowledge

It’s just human nature to avoid putting your money into something you don’t understand. You may not know the difference between dividends and derivatives or why Company A is a better buy than Company X. This is why Filipinos won’t put their hard-earned money in the stock market, where they believe anything could happen to it.

That’s not where it should end, though. Your lack of knowledge of how to invest should never be the reason why you won’t explore different investment instruments. It’s never too late to learn how investments work. Moreover, many free resources will teach you the basics of investments.

3. There’s Not Enough Money Left to Invest

Perhaps this is the biggest reason Filipinos don’t invest their money. With all the things to pay for on an income that’s barely enough, oftentimes there’s simply no money left to invest.

But the thing with investments is that you don’t need ₱100,000 or ₱1 million to invest. Many Filipinos think that only the wealthy can invest and that you must shell out a lot of money to profit from your investments. But this is another investment myth. Even with ₱50, you can already start investing.

The key is to save money regularly, regardless of the amount. Do away with non-essential spending or create more income streams to increase the amount of money you can save each month. More often than not, it’s not really the lack of funds that’s the problem but the lack of financial discipline.

4. Risking Money is Not an Option

This is money that you worked hard for. Of course, you don’t want to risk it in case it turns out to be an investment scam.

Even if the stock market or mutual funds are legitimate investments, you may still be discouraged by the risks involved. It’s not like putting your money in the bank where it’s safe and insured. There’s no guarantee in the stock market where stocks are known to crash in a bad economy.

So instead of risking it in investments with higher returns, Filipinos generally take the safer route and put their money in a savings or checking account, even if there’s not much yield.

“In a volatile market, it’s always best to go back to your foundations,” advised Randell Tiongson, a Registered Financial Planner. “It’s normal for markets to go through up-and-down cycles. This is volatility.”

There are investments for different risk appetites or risk tolerance. Determine how much risk you’re willing to take, and only invest money you can afford to lose.

What is the Importance of Investments?

As you get older, your financial responsibilities will also grow. Soon, having just a savings account won’t be enough.

If you want to build your wealth, investing is the key. Investing puts your hard-earned money to work. Your investments can increase in value over time and even beat inflation, mainly because of the risk-return tradeoff^[2] (an investment principle that indicates that the higher the risk, the higher the potential reward) and the power of compounding.

The Power of Compounding

Compounding happens when an investment generates earnings or dividends, which are then reinvested. These go on to generate their own earnings.^[3] In short, compounding means your investments generate earnings from previous earnings.

For example, you invest the dividends you received from your dividend-paying stock. To take advantage of the power of compounding, invest as early as possible and reinvest any dividends or earnings automatically.

What are the Advantages of Investing Money in Your 20s and 30s?

You’re only young once. So why not take this time to invest and potentially hit your financial goals sooner rather than later? If you’re in your 20s or 30s, this is the best time to make investments. Here’s why:

1. Time is on Your Side

Young adults in their 20s and 30s have time on their side and the power of compounding to their advantage. The earlier you invest, the more you can build wealth over time by reinvesting your earnings.

But because delayed gratification doesn’t work for everyone, the real challenge here is being patient and disciplined enough to let your investment stay put and grow through the years.

2. You Can Carry More Risks

Younger investors are more open to taking risks—ones that their finances can withstand, anyway. Because you have more earning years ahead, you can afford to take risks regarding your investments.

Younger Filipinos tend to gravitate to more aggressive investments with more significant gains, while Filipinos in their 40s or 50s are keener on low- or risk-free investments.

3. You Can Get Better at It Over Time

In your 20s or 30s, you also have the advantage of time and flexibility. You can spend more time learning about investments, how they work, and what the best types of investments are.

Even if there’s a long learning curve, you can afford to learn by trial and error since you have many years to refine your investment strategies and goals. You can also overcome investment failures because you have enough time to recover.

4. You’re More Tech Savvy

There’s no denying that young professionals these days are very tech-savvy. This makes it easier for you to research, study, and explore different types of investments.

You can apply all the online investing techniques you’ve learned from investment experts and websites. You can also make use of all available investing tools, such as online trading platforms. All these can boost your knowledge, experience, and expertise in investing.

Final Thoughts

Filipino motivational speaker Paulo Tibig couldn’t have said it better: “Ang kalaban ng pera ay pero.” If you want to build wealth, you must first have the right mindset. Be open to learning more about the importance of investments.

The bottom line is that anybody, no matter their income or age, can invest. It is by far one of the best ways to earn more money and achieve financial success.

Sources:

^[1]BSP’s Diokno: 75% or 54M Filipinos don’t have investments (GMA News, 2020)
^[2] Risk-Return Tradeoff (Investopedia, 2020)
^[3]Why Invest? (Wells Fargo)

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Nothing in this blog constitutes investment or financial advice or any recommendation that any security, portfolio of securities, investment product, transaction or investment strategy is suitable for any specific person. This material does not take into account your personal circumstances, finances, goals and/or objectives; all of which are unique to you. Readers must make an independent decision regarding investments or strategies mentioned on this blog or elsewhere on www.moneymax.ph. We strongly consider seeking advice from your own financial or investment adviser before taking any action. We do not make any representation or warranty as to the accuracy, completeness or correctness of the information set out in this article.

Invest Early to Build Wealth: This is Why Investing is So Important

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