Although I've been reading a variety of books on investing and personal finance, I've procrastinated getting a stock trading account and mutual fund shares. Blame Newton's First Law of Procrastination:" A graduate student in a state of procrastination will stay in the same state unless acted upon by an outside force."
My interest in finance started in earnest when I was still in my first teaching job. The university I was working for gave out free copies of the Wall Street Journal every week, and I read them for entertainment, as well as for finding out what Republicans more or less thought about. To help me understand what I've read, I started looking at finance books both from the fundamentalist perspective (Graham's The Intelligent Investor ) and from the Random Walker perspective (Burton Malkiel's A Random Walk Down Wall Street).
I've never liked taking things on faith, and so when there is a statistical or mathematical claim, I prefer being able to calculate and verify. So I started reading Graham and Dodd to help me get a better idea of how fundamentalists decide on value (it's mostly reading financial statements and calculating financial ratios, and some entrail reading for predicting future returns). I also got a copy of academic texts on finance and investments, which I haven't fully gotten around to reading yet. Mostly, if I need a summary of the academic results on investments, I either read Schaum's outlines, or do a google search for the relevant definitions.
During my time as a high school physics teacher, I invested my extra cash in fixed deposits in a credit cooperative. Although the returns were low (it was at around 5% per annum), it was relatively safe, since the cooperative mainly lent to employees of my school, and the payments for loans were automatically deducted from salaries. If I had stayed there, it would have been one of the good places to save for retirement. My estimate was in terms of risks of default, it would be between the same level as BBB bonds and having a diversified portfolio of junk bonds.
After leaving that job though, I needed cash to live on, and the fixed deposits I managed to save was worth about a few months of living expenses. To get access to that money, I had to leave the cooperative (stop being a member). This meant I needed a place for saving for retirement.
At first, I thought about opening a stock trading account, and then try to simulate an index fund. Since I didn't have enough capital to perfectly simulate the PSEi index (although I think simulating the all-shares index was better), I was thinking of buying stocks using a Monte Carlo method that ultimately converges to the same proportions as the PSEi.
Of course, an index fund was initially lower cost, but my intention was plain buy and hold, so I thought it would lower transaction costs using my strategy. There would be large tracking errors as my portfolio was being built, but as time goes on, it should settle to small values until I was effectively running my own index fund. As I did all that, I would be learning about index fund management.
Why do this when buying index fund shares was less labor intensive? I was motivated by the way mutual funds in the Philippines are systematically gouging money from their subscribers. One of the most important things I learned from Burton Malkiel was, if all other things are equal, the fund with the lowest costs would be the best performing.
When I first checked the web for index funds in the Philippines, there was only one, and they charged exorbitant fees per annum. The management fees was at around 1.5 percent per annum, and they charged sales loads. Note that index funds in the US (I was thinking of Vanguard) had zero loads as well as low management fees that were at around 0.20% So that index fund was bilking their subscribers for doing something that can be automated, since index fund portfolios follow an algorithm, so the management fees should be minimal. The cost of entry was also a big factor, with the initial investment at around PhP 50K.
After that, BPI set up a UITF that was an index fund, and the cost of entry was PhP 10 K. I couldn't find a prospectus, so I couldn't tell what the fees were. Although the summaries available on the BPI website did state a fee of 1.5% per annum. I do vaguely remember that before this, the entry requirement was around PhP 20K.
My final decision though was to get index fund shares from Sun Life, mainly due to the lower management fee of 1%, even though it had a 2% sales load. My investment horizon is greater than five years, so after 5 years, this should outperform an index fund with zero sales load but 1.5% management fees. There was even an option to get a zero sales load, but it meant larger back-end loads if the shares are redeemed earlier than 5 years. I chose not to avail it because I wanted to be able to redeem shares earlier in case I needed the money. If I had a greater savings reserve, I would probably have used it.
For those who choose to buy shares from Sun Life, one should be wary of being sold other products that you may not need. A conversation with one of their financial advisers is one of their requirements before you purchase shares, and one of the things these advisers will do is try to sell variable life insurance plans. These are hybrid products that are a combination of mutual fund and insurance. Regular premiums are expected here, and I'm guessing that getting these should cost as much or even more than getting insurance and mutual fund separately. I haven't crunched the numbers yet, so I can't be sure about that, but US experience says getting a VUL is more expensive, so I suppose the same dynamic works here. Once I get the numbers calculated (I got quotations for term life and the VUL), I should be able to give firmer concusions.