“I have extra money, where should I invest it?” asked a friend of mine.
“Wherever you want, as long as you know how that investment works,” I answered.
“But I don’t know anything about investing, that’s why I’m asking you,” he replied back.
“Then I guess you should invest in yourself. Buy books, attend seminars, read about investing online. Invest in learning about investing.”
“Come on. Be serious.”
“But I am serious,” I replied. “If you buy me dinner, I’ll give you a beginner’s crash course on investing.”
He fell silent. He was contemplating. And after a few seconds, he agreed.
“Good decision,” I exclaimed. “You just made your first investment.”
I know what you’re thinking. I just scored myself a free dinner. Ha! You’re absolutely right!
However, I did give my friend a crash course on investing and how to create his first portfolio.
Are you curious about what I taught him? Then read on, and there will be no need to buy me dinner for this. 😛
Before You Invest
A few things are required before you start investing. These are non-negotiable.
If you can’t do, or you don’t have them, then you shouldn’t really invest, in my opinion.
- You spend less than what you earn every month.
- Saved up for an emergency fund.
- You have a health insurance.
- For breadwinners: you have life insurance.
Making money from investments, especially the risky ones, take time.
If you can’t live below your means, and if you don’t have an emergency fund — then you’re at risk of having the need to liquidate your assets when its value is low.
Medical emergencies and other unexpected events can happen too, that’s why you need health coverage and life insurance. It’s for the financial benefit of you and your loved ones just in case something happens.
So, assuming that you’re able to pass these requirements. What’s next?
It’s time to have some fun with your money. 😀
The 30-Day Time Deposit
Your emergency fund is a substantial amount of money and there’s no reason why you can’t invest it. However, you can’t afford to lose any of it so the best place for that is a zero-risk time deposit.
I recommend half of your emergency fund be put in a 30-day time deposit. That way, it’s earning interest higher than a regular savings account, yet easily accessible when you need it.
Stocks, Bonds and The Money Market
How does the stock market work? What are bonds? What is the money market? Mutual funds? UITFs?
If you don’t know the answers to these questions, then you should invest in learning about them first. You don’t have to be an expert, but it’s really important that you understand them at the very least.
My rule of thumb is: “If you don’t know how it works, then you can’t invest in it.”
The Age Formula
Now it’s time to use what I call, “the age formula”.
I can’t really remember where I got this, but I’ve always believed it’s a good rule to follow. This formula will tell you how much percentage of your money should be invested in low, moderate and high-risk investments.
The formula is simple, and the rules are:
- Invest half your age in low-risk investments.
- Invest half in moderate-risk investments.
- For the rest, invest in high-risk investments.
So assuming you’re 30 years old and you have P100,000 to invest (your emergency fund is NOT included here). Then your portfolio will look like this:
- 30 / 2 = 15% or P15,000 should be in low-risk investments such as government bonds, treasury bills, etc.
- 50% or P50,000 should be in moderate-risk investments such as mutual funds, blue-chip stocks, etc.
- 100 – (15 + 50) = 35% or P35,000 should be in high-risk investments such as speculative stocks, forex, etc.
And that’s it! You have now created your very first, diversified and well-balanced portfolio.
As you can see, the younger you are, the more high-risk investments that you have. This is because it is assumed that you have more time to ride the market through bad times, and you have more active income potential to recover from losses.
I hope this post helps you in your investment decisions and portfolio allocation.
Do remember though that the best way to design your portfolio is to tie your investments to a concrete financial goal.
Do you have more time? Then read this next: A Beginner’s Guide To Investing in Anything and Everything
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