The Secrets of the Rich People

Why is it that some people get ahead faster than others in the money game? Why is it that many younger people are richer than you? I am not talking about rich kids whose parents are already rich. I am talking about ordinary people from the middle or working class, about the same age as you are and most likely earning in the same salary bracket that you are in. What is really the secret? The answer is Passive Income.

Let me explain here that there are only 2 types of income. One is Active and the other one is Passive.

What is Active Income? It is a type of income which requires the physical effort of an individual and is realized through salaries, wages, tips, commissions and income from business requiring ones participation. A good example is a 9-5 job.

What is Passive Income? It is a type of income derived from business ownership, rental properties and other enterprise in which an individual is not actively involved or participating in.  This is the answer to my earlier questions. Rich people work hard to increase their passive income.

There are 3 types of Passive Income

1.       Paper asset

2.       Rental Property

3.       Business

In this article, we will discuss paper assets. What are paper assets? These are investment vehicles which can be acquired in order for an individual to participate in a business or enterprise such as investing in the stock market, buying mutual funds, investing in bonds, money market and a lot more.

Let me begin with the most basic yet powerful investment called mutual fund. It is a professionally managed type of collective investment that pools money from different investors. In the Philippines many banks are already offering mutual funds such as BDO, Metrobank and BPI. There are also financial institutions such as First Metro Asset Management (a subsidiary of Metrobank), Philequity, Philam Asset Management, ATR-Kim Eng that are offering the same. Mutual funds range from equity or stock funds, bond funds, money market fund and dollar denominated funds.

What are the advantages of investing in Mutual Funds:

1.       Diversification – mutual funds buy shares from many publicly listed companies involved in various industries.

2.       Professional management – mutual funds are managed by highly competent fund managers who are appointed by the Board of Directors.

3.       Liquidity – should one decide to divest, mutual funds can be easily withdrawn.

4.   Government oversight – it is regulated and strictly monitored by the Securities and Exchange Commission (SEC).

5.       Minimum investment requirement which is 5,000 PHP and additionally 1,000 PHP to increase.

What are the disadvantages of investing in Mutual Funds:

1.       Fees – There are fees involved depending on the policy of the Company offering the mutual fund but usually it is very minimal.

2.       Less participation – since mutual funds are managed by a fund manager, all that an investor can do is to study the various funds during his or her selection process and once invested, he or she can only increase or withdraw the investment. Only the fund manager can do the buying and selling of stocks or securities for him or her.

I personally believe that investing in mutual fund is the most basic investment one should have especially for beginning investors. It doesn’t require one to be genius in the market since it is already managed by a professional fund manager. For a starting investor, mutual funds offer complete diversification that will protect one from risk with just a minimum investment of 5,000 PHP. In my case, I invest my money in equity or stock mutual fund. I have chosen First Metro Asset Management, Philequity and Philam Asset Management to do the investing for me. Investing which means the buying and selling of stocks. What I only do is buy shares of mutual funds every month after I receive my salary.

A word of caution before we move ahead and before you get excited and invest all your money in mutual 

funds. As what I always tell people, only invest if you are able to establish a minimum inventory of cash. How

much is that minimum, it depends on your cost of living and monthly income. In the world of finance, 6 

months’ worth of monthly salary is enough. Why? The reason is that, should there be an emergency

(hospitalization, company closure, calamity or a recession) you will not be withdrawing your investments

especially when the market is in the down period. What you will use for your day to day survival is your cash.

Another important thing that I tell people is that, if you are going to put your money in any form of investment,

say, in this case mutual fund or stocks for 1 or 2 years, forget it. Mutual fund and stock market are not for

you. You might as well put your money in banks. If you invest your money in mutual funds, put it there for 10

20 years. It is something that you do for your retirement. Or at the very least, you should have a time horizon

of 5 years. Meaning, you don’t withdraw your investment, you keep it there and increase for 5 years.

So there you go, Secret of the Rich number 1 – investing in mutual funds. On my next article, I will be discussing Secret of the Rich number 2 which is investing in Stock Market and how to do it online whether you are in Manila or abroad. I am based in Dubai and I make money in the stock market online. Learning stock market can also be done online nowadays. So watch out for my next article.

Important points before you start investing in mutual fund and online stock investing

1.       Make sure that you have enough cash in your savings account allocated for emergency situations. This should be atleast equivalent to 6 months of your monthly salary. If you still do not have the 6 months cash cushion, 3 months is acceptable then from thereon, increase your cash position every month when you receive your salary. You can do this by setting aside 20% of your salary and then out of which, you put 50% in your savings account and the remaining 50% in your investments.

2.       There are various types of investments ranging from mutual funds, stock market, ETFs, real estate properties, buying a franchise and starting your own business. Remember that before you start investing in any of the business I have mentioned, it should be started only after you have carefully reviewed the risk-reward aspect of it and if only you are able to answer the following questions.

-          Is it something that you like doing even if you are not compensated, you would still find the time and enthusiasm to do it?

-          Is it within your core gift?

-   Are you the aggressive type? moderate? Conservative type of an investor?

I believe that the 1^st 2 questions are applicable if you are buying a franchise or starting a business. But if you are investing in mutual funds or the stock market which are also called paper assets, you need not ask yourself these questions. You put your money in mutual funds and stock market because of the great returns that these funds can give in the long term. On average, mutual funds return a growth rate of 12-15% per year. Infact, there are great mutual funds out there that give a return of 20% average per year. While investing in the stock market can give an average of 15-17% per year if you will stay invested for 15-20 years.  Assuming that mutual funds and stocks give a return of just 7% which is very conservative and will most likely happen should there be a recession that will last for 5 years, it is still a viable investment platform compared to time deposits being offered by banks which can only give you a 2-5% return minus withholding tax of 20% from the total profit every year.

3.       I always emphasize this to newbie investors. Invest only if you are in for the long haul. Meaning your time horizon is from 5 years to 30 years. If you are not into the idea of long term investing, better put your money in banks and let it grow by only 2% every year less withholding tax. What banks will do is they will invest your money in mutual funds, stock market and lend it to businesses and individuals. Personally, what I do is I buy shares of profitable and well managed banks such as Metrobank, BDO, China Bank and Security Bank through my online brokerage firm Citiseconline.com. Because these banks are well managed, individual and institutional investors and fund managers chase them. Since these banks are patronized by these investors, their price per share shoot up from which I earn aside from the dividends that they declare every year.

4.       Make it automatic. When you receive your salary, when you have an extra money. Make it a habit to put something for your future by investing it in mutual funds and the stock market. Increase your cash position in your savings account so that you are liquid and your comfort factor increases and then use whatever is left to manage your expenses. If there is a little extra, that is the time that you can go to malls.

5.       Sure there will be a recession, sure inflation is inevitable, sure there will be crisis, calamities etc. Nobody can predict when these things will accurately happen. Even PH.D holders are unable to give us a definite answer. Sure they are good at estimating but again, these are only estimates. So as investors, we are not bothered because we only do 2 things. First, we look at company earnings and Second, we invest every month no matter what because if your time horizon is 10-30 years, these occurrences are nothing. We look at crisis as opportunities to buy stocks or mutual fund shares at bargain or fire sale prices. Try to google successful investors who are billionaires now such as Warren Buffet, Prince Al Waleed, Peter Lynch and so many other investors. They became a lot richer because they did their shopping during the down period while the rest were panicking. “Long term investors get rich when there is blood in the streets”.

So there, the above should serve as an easy to follow guideline so you can kick-start your plans for investing. Buy mutual funds first because I believe this is the basic commodity followed by stocks. Nowadays, one can invest money in stock market or do mutual funds investing online. The latest technology has made online stock market investing and mutual funds investing so much easier. Watch out for my next article where I will be discussing in detail the different types of investments with emphasis on mutual funds and stocks which are popularly known as paper assets.