Founder's Letters to Clients: Q3, 2018

To the valued clients of Forest Financials,

I started Forest Financials to become one of the few financial service organizations who is sincerely focused on our clients and their finances. After all, you didn't just entrust us with your money. You allowed us to help you build a better future for yourself and your family. This responsibility is big.

The purpose of this quarterly letters addressed to you—the valued clients of Forest Financials—is to help you understand and analyze what is happening in the world of finance and how it affects your hard-earned money and the success (or failure) of your investments. This is my own little way of taking the responsibility to help you make intelligent financial decisions.

Today, I will discuss a few important events that happened in the Philippines and how it affected (and could affect) your money and investments.

This specific letter covers data for the third quarter of the year 2018 (July to September).

Philippine Inflation

From July to September 2018, the Philippines witnessed a steady increase in our inflation rate. In the month of July, our inflation rate was at 5.7% (coming from 5.2% in June 2018). Then, the following month, it skyrocketed to 6.4% for the month of August. And for the last month of the third quarter of the year 2018, September, we saw another increase, 6.7%.

What is inflation and how does it affect you as a person who uses money for your day-to-day life?

Inflation is the general increase in prices and fall in the purchasing value of money. 

Let me give you a simple example of how inflation affects your everyday life.

In June 2018, as per the Philippine Statistics Authority, the prevailing price of 1 kilogram of galunggong in Metro Manila is ₱75.00. Fast forward to the current month, October 2018, your ₱75.00 isn't enough to buy 1 kilogram of galunggong. You now need ₱140.00. As you can see, you lost a significant value in the purchasing power of your hard-earned money. If your only source of income is the salary you are getting from your day job, then chances are high that your salary didn't increase to fight the negative effects of inflation. Needless to say, you are at a disadvantage if you are solely relying on your salary.

Philippine Interest Rates

The Bangko Sentral ng Pilipinas raised the interest rates last August 2018 over high inflation rates. What regular Filipinos need to know is why and how it will affect them.

Interest rate changes are at the heart of the BSP's conduct of monetary policy. This is for the BSP to try to influence the increasing rate of inflation in the country.

Here's how it works:

When the rate of inflation increases, your money's purchasing power decreases. As discussed earlier, your ₱75.00 could buy you 1 kilogram of galunggong in Metro Manila in June 2018. But because of the steady increase in inflation for the months of July to September 2018, you will now need ₱140.00 to buy 1 kilogram of galunggong for the month of October 2018.

Now, in order for the government to control the steady increase of inflation, the BSP will increase the interest rates or the amount charged, expressed as a percentage of principal, by a lender to a borrower. This is to discourage Filipino consumers to borrow money, leading to the decrease in spending.

Why would the BSP want the Filipino consumers to lessen their spending? It is because when there is a decrease in spending in a given economy, the direct effect is less demand for goods and services. Low consumer spending would then encourage businesses to lower their prices and cause inflation to fall or at least stabilize.

To put everything simply, increasing inflation rates means decreasing the purchasing power of your money. This will result in increased interest rates to lower consumer spending. Low consumer spending means businesses will be forced to lessen the prices of their products and services. When prices for products and services are low, inflation tends to fall or stabilize.

Now, we need to realize that the changes in monetary policy usually operate with a lag of around ten to twelve months, so the effects of the interest rates hikes and even inflation may not be felt immediately.

The Stock Market

When inflation rates increase, interest rates increase as well. This results in low consumer spending. When people aren't purchasing products and services, businesses' earnings tend to fall as well.

Now, the effect of this scenario on your investments is something you can't overlook. When publicly traded businesses report lower earnings because of the effect of inflation and higher interest rates, their stock prices drop as well.

When the stock prices drop, the value of your investments also drops.

Although the effects of inflation, interest rates, and other influential events locally and abroad won't necessarily reflect immediately in the market, we can see that the PSEi became volatile in the past three months:

  

The PSEi closed at 7,193.68 level in June 2018. It then closed at 7,672.00 in July 2018, a 478.32 increase. For August 2018, the PSEi closed at 7,855.71, up with 183.71 points. Then, the index closed at 7,276.82 in the month of September 2018, a 578.89-point decline.

What then should a simple Filipino do to protect and grow his/her hard-earned money?

We need to realize that inflation, emotions like fear and greed, and the presence of other risks are normal in any given economy. These are the risks that we have to face as investors on a daily basis. Here's a few advice that I can share with you so you can protect and grow your money:

1. Don't rely on a single income.

You will lose to inflation if the only source of income that you have is your salary. Salaries don't adjust to inflation. They will remain the same unless you are promoted or you earn a commission or bonus.

The best way to beat inflation is for you to set up multiple streams of income that produce non-fixed profits like investing in stocks or starting your own business.

Remember, one of the best ways to beat inflation is to increase your income.

2. Invest in yourself.

You've heard this a million times for sure. But if you want to succeed in building wealth for yourself and your family, then you need to increase your knowledge about money and the world of finance. How could you expect to win a game when you don't know the rules?

Living in an economic world, we need to accept that money is an important part of our lives. Religion will tell us that money is the root of all evil. People with no money will tell you that money is not important.

However, frankly speaking, ignorance is the root of all evil. For ignorance breeds poverty and poverty forces people to do evil things.

Thank you for taking the time to read and understand the letter that I prepared with love for you. Let's share this with our loved ones so we can inspire them to manage their finances responsibly.

Sincerely,

Alfred Cardenas, CIS