Understanding Asset Allocation & Investment Time Horizon

• Asset allocation is the proportion of different investment types in a mutual fund portfolio, such as stocks and bonds.
• A typical asset allocation might be 60% in stocks (with a third in foreign stocks) and 40% in bonds.

Reducing Risk

• There is a correlation between an investment’s potential return, chance, and magnitude of a short-term loss.
• Asset allocation balances the desire for higher returns with one's ability to withstand short-term losses.
• The realistic ability to withstand losses depends on one's time horizon.

Investment Time Horizon

• Time horizon is the period between now and when the money is needed for a financial goal.
• An example is a 40+ year time horizon for a 20-year-old planning to retire at 60.
• An example is a five-year time horizon for saving to buy a home by age 35.

Short-Term Goals

• Investing for short-term goals is simple.
• For less than two years, stick to money market funds for safety and returns.
• For three to seven years, consider shorter-term bond funds.
• For seven or more years, consider investing in stocks and bonds.

Long-Term Goals

• Long-term goals, like retirement and college tuition, need complex asset allocation.
• For retirement, the portfolio needs to fund living expenses for 20+ years.
• Current age and years until retirement are important factors.
• Younger investors with more years until retirement should be comfortable with growth-oriented investments like stock funds.

Investment Personality

• Conservative investors have little experience in stocks, fear markets, and are risk-averse.
• Moderate investors have some experience in stocks and comfort with risk.
• Aggressive investors have experience in stocks and comfort with sensible risk-taking.

Fund Investing Strategy

• Market timing involves buying low and selling high, but market movements are unpredictable.
• Buy-and-hold investors rely on long-term trends and know good years outnumber bad.

Putting Plans into Action

• Constructing a mutual fund portfolio is like building a house.
• Centralizing investments in one fund family reduces administrative hassles.
• Avoid hybrid funds and stick to purebred funds to match fund allocation to asset allocation.
• When allocating with limited funds, buy a hybrid fund matching your desired mix, or buy desired funds one at a time over time.

Mutual Fund Investment Objectives

• Growth Funds: aim for capital appreciation by investing in stocks. The goal is long-term growth with higher risk.
• Income Funds: focus on generating regular income through bonds or dividend-paying stocks.
• Balanced Funds: aim to provide capital appreciation and income by investing in a mix of stocks and bonds.

Classification of Mutual Funds Based on Maturity Period

• Mutual funds classify by investment structure, which affects when investments can be redeemed.
• Open-Ended Funds
  • Allow investors to buy or redeem shares at any time.
  • Share value bases on Net Asset Value (NAV) at the close of each trading day.
  • Shares issue and redeem continuously.
• Closed-Ended Funds
  • Issue a fixed number of shares at launch.
  • Once sold, no more shares can be purchased.
  • Investors can buy or sell shares on the stock exchange at market prices, which may differ from NAV.
• Interval Funds
  • Are a hybrid between open and closed-ended funds.
  • Allow investors to buy or redeem shares only at specific intervals like quarterly or semi-annually.
  • Less liquid than open-ended funds, but offer more flexibility than closed-ended funds.
• Open-ended funds are most common and offer flexibility for investments and redemptions at any time.
• Closed-ended funds have fixed shares bought and sold on the market, and their prices can differ from their NAV.
• Interval funds allow transactions only at certain times, offering a balance for investors okay with less liquidity.

Types of Mutual Funds

• Stock Funds (Equity Funds): invest primarily in stocks and are suitable for long-term growth.
• Bond Funds (Fixed-Income Funds): invest in government and corporate bonds and are less risky than stock funds.
• Money Market Funds: invest in short-term, low-risk securities and are ideal for short-term savings.
• Index Funds: Designed to mirror the performance of a specific market index.
• Balanced Funds: Invest in a mix of stocks and bonds to balance risk and reward.

Money Market Funds

• Money Market Funds earn dividends, like interest on bank savings accounts.
• Money market mutual funds may offer higher yields, some are tax-free, and they provide convenient access to other mutual funds.
• Money Market Funds are used for emergency cash reserves, short-term savings goals, and as a parking spot for money awaiting investment.
• Under SEC regulations, money market funds invest only in highly credit-worthy securities with an average maturity of less than 90 days.
• Securities include commercial paper, certificates of time deposit (CTDs), and government debt.

Bond Funds

• A bond is similar to a certificate of time deposit (CTD) issued by corporations or governments.
• A Wal-Mart 5-year bond may pay 6% interest, with the principal returned after five years.
• Bonds are safer than you think, as a bond mutual fund can provide a diversified portfolio of bonds to mitigate risk.
• They provide higher interest rates than comparable bank investments.
• Even bank deposits and Treasury bonds carry risk.

Sizing Up a Bond Fund’s Personality

• Maturity is when the principal is returned.
  • Short-term: Bonds maturing in a few years.
  • Intermediate-term: Bonds maturing within five to ten years.
  • Long-term: Bonds maturing in 15 to 20 years.
• Duration measures interest rate risk. A bond fund with a 10-year duration drops 10% in value if interest rates rise by 1%.
• Credit quality measures risk.
  • AAA & AA: High-quality investment-grade bonds.
  • A & BBB: Moderate-credit-quality bonds.
  • BB or lower: High-yield (junk) bonds with higher default risk.
• There are different issuers:
  • Treasuries: Government-issued bonds.
  • Corporates: Bonds issued by companies.
• Common financial goals for bond funds are for major purchases, a part of a long-term diversified portfolio, and generating current income.

Stock Funds

• Most stock market investors succeed through patience and three simple investment methods.
• Investing in a diversified portfolio of stocks.
• Continuously saving and adding to investments.
• Avoiding market timing.
• Common investment mistakes that should be avoided include not understanding risk, ignoring taxes and overall financial planning, paying unnecessary commissions and fees, falling for sales pitches, and excessive trading.

Balanced Funds

• A balanced fund invests in a mix of asset classes, typically stocks and bonds.
  • The goal of a balanced fund is to provide diversification and reduce risk while still aiming for reasonable returns.
• By holding stocks and bonds, balanced funds help spread out risk.
  • Stocks offer growth potential, while bonds provide more stability and income through interest payments.
• These funds are designed to appeal to investors who want a middle ground between aggressive growth funds and conservative bond funds.
• They aim to achieve capital appreciation and income generation.

Investment Compositions

• Money Market Fund: Low risk, Conservative investors, short-term instruments, 3-6 months, stability and minimal growth, low returns (1-2%).
• Bond Fund: Moderate risk, Moderately Conservative investors, fixed income instruments, 1 year, stability and reasonable growth, low to moderate returns (4-6%).
• Balanced Fund: Balanced risk, Moderate investors, stocks and fixed income instruments, 1-3 years, medium to long-term, moderate to high returns (8-12%).
• Equity Fund: High risk, Aggressive investors, shares of stocks, 3+ years, long-term capital growth, high returns (12-18%).

Frequently Asked Questions

• If you don’t have the background to know enough about stock or bond investments, The fund manager is responsible for managing the investments, including decisions on where to allocate funds.
• The fund manager takes care of managing your mutual fund investment.
• You can switch from one fund type to another depending on your needs.
• The fund manager handles the investments, so you won’t be burdened with the stress that often comes with stock or bond investing.
• If you are "unlucky" in investing, you can choose a fund with lower risk.
• Yes, the minimum amount for an investment is only PHP 5,000. If you decide to add to your investment, the minimum additional amount is just PHP 1,000.
• You can see the results of your investment as early as 3 months, including any gains or losses.
• Yes, you can invest anytime and using dollars, and dollar-denominated funds cater to OFWs and international investors.