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• Liquidity - Portions of the VUL policy's cash value can be withdrawn anytime I see fit.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.

My Take On Cost Averaging

 

As many of you already know, the Philippine Stock Exchange Index (PSEi) has been on a rampage, breaking record highs day after day after day. Value investors must be smiling right now since most of the stocks they bought one or two years ago are probably 3 or 5-baggers by now. Those who invested in the stock market via cost averaging (as recommended by Bro. Bo Sanchez in his free e-book) are probably smiling too. But some people might be asking: what the heck is cost averaging?

According to wikipedia, Cost Averaging is an investment strategy wherein money is invested in equal amounts regularly and periodically over specific time periods (such as P1,000 monthly) in a particular investment or portfolio. By doing so, more shares are purchased when prices are low and fewer shares are purchased when prices are high. The point of this is to lower the total average cost per share of the investment, giving the investor a lower overall cost for the shares purchased over time.
Like I said before, I am not a big fan of Cost Averaging. I must admit, though, that I would have used this investment strategy during the global economic recession. Bu that was 2008. Fast-forward to 2010, if I were asked right now if I would cost average my investments, I'd probably say 'No'. Here's why:
Cost averaging is feasible in any market, whether rising or falling. But while it is true that a person who invested Php120,000 in a top performing equity mutual fund in 2009 through cost averaging (10k per month) would have probably earned more than 100%, fact is, that person didn't maximize his potential ROI. As seen in the image below, cost averaging was not as feasible compared to a lump sum investment. Both strategies, however, did give decent returns because we currently are in a bull market.

On the other hand, when the market is going downhill, it may be wise to cost average an investment for the simple reason that we do not know when a market hits its bottom. At the same time, we are able to mitigate the risk of buying too many shares at too high a price. As we can see in the theoretical scenario below, the total average cost per share of the investment was lowered significantly compared to a single lump sum investment. In this scenario, cost averaging was the more feasible investment strategy.

In a nutshell, money cost averaging is still feasible at any market. But in a bull market, doing so may not yield the maximum earning potential of your investment. In a bear market, however, cost averaging is a more favorable strategy. How about you? What's your take on cost averaging and other investment strategies? Let me know by dropping a comment below. Thanks! P.S. If you like this post, kindly use the share button above, or subscribe to Richardson Consulting. That's all for now. Happy investing everyone! =)

Maids Can Invest in the Stock Market, Why Can't You?

Last week, I wrote about how to open PDF files on iBooks, and gave away a copy of Brother Bo Sanchez' free e-book entitled "My Maid Invests In The Stock Market... And Why You Should, Too!". As promised, I will be sharing my thoughts about this e-book, and how it has affected my mindset when it comes to investing in the stock market.

Before reading Brother Bo's e-book, I was already investing in the stock market, or should I say, trading in the stock market. I started with a capital of Php1,250 and was only able to buy the minimum board lot of one of the blue chip companies here in the Philippines. Fast forward two and a half years later and out came this ebook with a really catchy title. I mean, really? Maids? Investing in the stock market? Yeah, right! But after reading the whole thing from cover to cover, multiple time, I was kinda wishing Brother Bo published this e-book one year earlier, back when the economy was still down and most stocks were cheaper.

But let's not dwell with the past and just try to move forward. Through this e-book I learned that Money Cost Averaging is actually feasible in a rising any market. I've never liked this investing strategy, partly because, it requires a lot of discipline, and more discipline. But experience has taught me that cost averaging actually works. Details will be discussed in a future post.

"Be fearful when others are greedy, and be greedy when others are fearful." This is one of Warren Buffett's rules on investing, which was quoted in the e-book. Why did I highlight this? Because when others were fearful (because of the global economic crisis), I WAS TOO! And it cost me. It cost me a lot. Let's charge that to experience. "How much of a lost opportunity was it?", one might ask. Here's how much:

• MEG was worth around fifty centavos per share back in early 2009, today it is worth around Php 2.50.
• AP was worth around five pesos per share back in late 2008/early 2009, today it is worth around Php 25.00
• DMC was worth around five pesos per share back in late 2008/early 2009, today it is worth around Php 33.00

In addition to these two valuable lessons, Brother Bo gave us a freebie by actually listing down some stocks that he recommends (this was then only available to Truly Rich Club members). Here are the YTD performances of some of them: 

Notice that the stock prices of most of the companies listed in the e-book rose pretty high. Their growth rates beat interest rates of bonds + regular savings + time deposit accounts combined. For the one that didn't, well, it gave out huge cash dividends. :D

In a nutshell, "My Maid Invests In The Stock Market... And Why You Should, Too!" is a good read. Had this book been published one year earlier, it would have made a big difference in my net worth. But this is not about me. It's about you, my dear readers. This e-book makes you realize how easy it is to invest in the stock market. And how instrumental stock market investing could be to the achievement of your financial goals. Bo's maids can invest in the stock market, why can't you?