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How Much Annual Interest Rate is a Good Investment?

 


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Excerpt

 


 

How much of an interest is a good investment for you?

This depends largely on your goal. If you’re only on the lookout for extra cash flow, then anything that’s fixed, guaranteed, and that beats the bond rate of the government or inflation, then that’s already good enough.

If you’re after growth, then it’s a totally different story. The benchmark for growth when it comes to investments is the PSCI. 

Last year, Pag-Ibig MP2 beat PSCI as it wasn’t an attractive investment option. The PSCI is the benchmark because in most cases when you beat the PSCI, you also beat most of the mutual funds out there.

Many people have the misconception that when they get a good rate of return for this year, they’ll also get a good, or even better one next year. But there will be times when this will not happen.

No investor, even the good ones, have a compounded growth rate of 100% because there will be years that will be bad. This is why Marvin Germo always says that you should not solely focus on growing your money. When you already made money out of it, you should transfer it to something that will give you cash flow so that you will have some stocks at hand that will help out when the market doesn’t do so good. You can put it on another asset class, invest in another market, or use it for stocks again as well.

Some of Marvin Germo’s stocks in America have done very well this past year. The US stock market has been reaching an all-time high, and because Marvin had his own US stocks, he was affected by it a lot! 

McDonald’s did really well last year despite the recent drive for healthier food. According to Marvin, McDonald’s has been pivoting into different things such as their McCafe. The same is happening to National Bookstore. The last time Marvin went into one, he found that only a fifth of the store was filled with books, the rest was full of office and school supplies. Authors who rely on National Bookstore for exposure might be affected, but those who publish their books on their own won’t be. The people who publish their own books have Lazada and Shoppee to use.

In essence, it’s the people who create the most value and know how to pivot their situation into a favorable will always win.

 

You mentioned a while ago that regarding the growth percentage, as long as you beat inflation, you’re good. How much was the inflation rate last year?

There was a time when the inflation rate was below 1%. For the entire year, however, it wouldn’t have surpassed 5%. All the things that made inflation scary during 2018 were almost nonexistent during 2019. In fact, the only thing that hindered the market was the trade war between the U.S. and China and the news of our President threatening to close down Manila Waters and Maynilad. 

These things affect investors, foreign investors in particular because these pieces of news can dictate whether other investors will put their money in the Philippines or another country. Bear in mind that the PSCI is made up of mostly the money invested by foreign investors. 

 

Do you think that the contracts of these Water companies (Manila Waters, Maynilad) will be renewed?

Marvin honestly doesn’t know because their situation no longer depends on how the company performs. It’s an outlier right now. It could go several ways. The first circumstance is that a new President will win in 2022 and things will go back to normal. In this case, you should invest right now. Second, you could wait until things clear up before you put your money back. Lastly, you might think that things won’t get better for them, so you should pull out your money and invest them elsewhere.

It’s difficult for Marvin to see what will happen at this point. However, when you look at their earnings last year, MPI has been grossly undervalued at PHP4.50. MPI is composed of Meralco, Maynilad, Toll Roads, and some hospitals. When analyzed further, you’ll see the Meralco alone is worth PHP4.50, the rest are just bonuses. Meralco, Maynilad, and Toll Roads are all government regulated. That’s why some people are scared that after the water utilities were targeted, electricity and the roads might be next.

People don’t like uncertainty. They would rather know that something is consistently bad than them not knowing what will happen to it later on.

 

Would you say that when you’re investing for growth, anything other than 3% is already okay?

According to Marvin Germo, you should focus on the PSCI when it comes to growth. Anything that beats the PSCI should do. Last year, the PSCI was around 4%. That’s because it encapsulates some of the more popular stocks. However, in 2019, Ayala and Ayala Land were both down, the only one that had a high percentage was SM. 

That being said, because President Duterte said that the reclamation in Manila wasn’t going to happen, it somehow gated SM from getting even better.

Going back to the question at hand, the goal is to always beat the PSCI. For example, if Marvin was able to accumulate 25% while the PSCI got to 40%,  you can say that Marvin underperformed. However, in the cases where the PSCI got just 30% and Marvin got 31%, then you can say that he already had a good year.

It’s not something that’s static to a specific percentage. It’s all about the profits of PSCI.

 

In Dave Ramsey’s book, he said that anything that beats inflation, which is 6%, plus 2% for retirement, plus another 4% for growth, for a total of 12% is good for him. What do you think about that?

This is good especially when you consider the context. Marvin Germo sees Dave Ramsey as a mutual funds type of person. This means he just puts the money in. That fund that he invested in should be able to beat that 12% over a period of time.

It’s different when it comes to the stock market, however. Your trades depend on how your earnings will work. Marvin can’t benchmark it to a certain percentage. He likes the fact that in a way, it gives the person a round number that he needs to get so that he can have a buffer for his money to grow.

12% on a yearly basis is already good, especially if you do it passively. 12% annually would mean that your money will double in about 8 years. And it would be faster when you choose to compound it.

This is under the context that the businessperson investing is earning enough from his own business so that he can trade in his spare time or that they’re employed but they have another stream of income. 

The advantage of businesspersons is that if their business is doing really well, then the money that they invest would just be their extra funds. 

Marvin thinks that Dave Ramsey is a mutual funds kind of person. Not necessarily just bonds because there’s still some equity components in them. Assuming that the mutual funds that dave invested in were in the US stock market, then it would have performed really well. Even after all that has happened with the US, it’s still at an all-time high. 

 

What do you think drove the growth of the US Stock Market?

People are saying that the economy of the US is doing very well. Based on the reports that Marvin is seeing the US economy is doing much better under Trump than it was during Obama’s time.

That being said, there are some people that believe that reports are skewed, particularly the ones that don’t exactly like trump. One of the said reasons why Trump was able to improve the US economy was through his tax incentives. These tax incentives were supposedly for companies to save up money so that they can expand and thus bring in more jobs. What happened was that instead of using the money to expand, they used it to buy back their stocks. When they buy back their own stocks, they remove those from the market, effectively decreasing the number out in the market thus increasing its value. 

This was great for stock investors but really bad for the people without any jobs.

 

How much were you able to do last year in terms of percentage?

Marvin was able to beat the PSCI itself, a little bit more than 20%. There were trades at the time that were really good. This is what’s good about the stock market. Your good trades can compensate for the mistakes that you made before. The technique is if you were wrong about a trade, then you should cut it. If you were wrong about investing, you should check if the valuations are still good, if they are, then you can hold. If they go down, you can still buy more.

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