Opportunity Cost

Opportunity Cost is defined as "the loss of potential gain from other alternatives when one alternative is chosen". *

The past few years, I have watched a lot of opportunities pass me by, due to decisions I made in the past. Those opportunities are goners. I can never get them back. Charge to experience, so to speak.

In my experience, I missed the opportunity of having a 7-bagger in my investment portfolio because I decided to get an Variable Unit Linked insurance.

The Story

Back in 2007, when I was only 22, I started investing in mutual funds and stocks. I was still learning the ropes in the equity markets and I was willing to defer to the fund managers because I figured, these guys know what they're doing, so I'll just let them invest my money for me.

I thought I was being smart with my money by investing it in mutual funds linked to an insurance (VUL). So I took a Php1 Million insurance policy, which, if you know by now, I will never benefit from because I would be already dead or too grumpy old), and the insurance company will invest the rest of the premiums into their mutual funds. Boy, was I so wrong. So wrong.

Why Get A VUL

• Protection - In case of my untimely demise, my loved ones will receive a decent amount to cover for lost income. 
• Potentially High Returns - since part of the premiums I pay is invested in equity, balanced, or bond mutual funds, they have a potentially higher rate of return than a time deposit.
• Liquidity - Portions of the VUL policy's cash value can be withdrawn anytime I see fit. Although the insurance company highly encourage policy holders to reinvest the amount they withdrew. 

Why Not Get A VUL

• Expensive - A Php1 Million Term Life insurance coverage for a 30 year old today costs only Php320.00 a month, or less than Php4,000 a year. At 22, the premium should be lower. Why pay Php25,600 for the same amount of coverage?
• Ridiculously high fees - During the first year, 85% of the premiums went down the drain (or to the company, or agent, or the insurance coverage). At the 2nd year, 50%. 3rd year, 25%. Plus there's a monthly management fee of around 0.5% to 1%
• Poor Rate of Return - I started investing in VUL right around the same time the global economic recession started. The PSEi tanked below 2000 between 2008 and 2009. Fast forward to 2013, the PSEi is reached an all time high of 7,392.2 0. But my VUL's cash value remained under water at -31.11%. The PSEi jumps to 270% and myVUL is still at -31%. What the F?

The Lost Opportunity

• DMCI Holdings, Inc. (DMC:PM) was trading at around Php9.00 per share in December 2007 (the month I started investing in VUL)
• During the global economic recession, it tanked to as low as Php2.50 per share
• This year, it skyrocketed to Php84 per share
• On top of that, DMC consistently gave out dividends ranging from Php1.00 to Php2.00 per share per year

Cutting My Losses

After five and a half years of paying Php6,400 quarterly, I decided to cut my losses and take whatever cash value my VUL had. I figured I'm young enough to recover those losses by making smarter, more educated investment decisions in the future. And my family is protected four times the amount anyway, thanks to the insurance at work.


The Numbers

Insurance Coverage: Php1,000,000
Payment Plan: Php6,400 quarterly for 10 years (Php256,000 in 10 years)
Total Premiums Paid (TPP): Php140,800
Cash Value Redeemed: Php97,000
Actual Loss: Php43,800 (-31.11%)

Had I Invested the same amount in DMC, I would have had:
Approx. No. of Shares Purchased: 13,581 shares
Share Price at Date of VUL Redemption: Php50.8
Value at Date of VUL Redemption: Php689,817.72
Potential Profit if sold on 7/2/13: Php549,117.72 or 390%


Share Price as of 9/5/14: Php82.2
If I held the position and sold yesterday, I would have gotten Php1.16M* or 693%. Well look, I don't have to die to get my one million pesos!

* Rough but very close estimate. Commissions and dividends not factored in

Lessons Learned:

• Don't get too excited to invest. Know what you're getting into before you actually get into it.
• Don't be swayed by friends/relatives who might be selling this crap to you. If your friends/relatives are in this kind of business, ask them to sell you Term Insurance or Mutual Funds instead. 
• Don't be a stupid lazy investor. If you are a lazy investor like me, be the right kind of lazy. There's COL Financial's EIP for stocks, or BDO's EIP for UITF's, or BPI's RSP for UITF's and MF's. Also, you can avail of a Truly Rich Club membership and follow the Strategic Averaging Method. 

* Disclaimer: This is not a paid post. I was not paid to promote any of the companies mentioned in this blog post.