Business, Personal + Finance

Wednesday, August 16, 2017

Lack of Estate Planning may lead to family squabbles, problems and burdens


Last week, I talked about estate planning its tools, including its pros and cons. Although I mentioned some vague examples last week, today I'll talk about the how the lack of estate planning now may lead to family squabbles, problems and burdens.

Let me first define Estate Planning once again:
Estate planning is the detailed and systematic study of the personal and financial affairs of a person to help him/her adopt and carry out a plan, for the disposition of properties and earnings that can give the family left behind, maximum benefit and satisfaction.

“You can avoid jealousy and hatred with one stroke of the pen.” - Gerald Sacks

The stories of family relationships destroyed by the lack of wills or unfair distribution of assets are heartbreaking. Despite all evidence to the contrary, people somehow still think that their adult children will be special and manage to work things out which is rarely the case.

What typically happens is that we don't do estate planning because we are not aware of it or because of perceived high consultation costs. Filipinos normally want advice but don’t want to pay for it. It’s not a simple one-advice or solution fits all; not even insurance is appropriate for all scenarios (as discussed last week). The process that we do are as follows:
·         -We sit down, determine the sizes of assets
·         -compute how much the estate tax is
·         -see & plot the big picture to plan the solution strategy

Only then you could identify ways you can pay less than the estate as well as various obstacles along the way (like properties that are still under the name of your ancestors, inheritance planning and so forth). People will soon realize it’s not easy to settle estate particularly real estate properties and business stakes. No estate planning will one way or another lead to the following:
·         Conflict between heirs/relatives – conflicts can lead to family feud that could last for generations & even worse, lead to crimes among blood relatives
·         Shrinkage of Estate – Due to Estate Tax payments or penalties.
·         Death of business – due to it being sold, mismanaged, or the like scenario.
·         D.I.Y (Do-it-yourself) execution errors – although it is good to educate yourself regarding estate planning, there are risks due to bias (hence the need for a professional). Transferring assets or properties too soon may lead to a number of problems such as: loss of control, loss of possession and ownership enjoyment (you could end up homeless), pre-maturely rich heirs (how capable are they in dealing with sudden wealth?)
·         Here's a couple of real-life examples:

“Listen to advice and accept instruction, and in the end you will be wise.” – Proverbs 19:20

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The writer is an RFP® –Registered financial planner and helps people through CERTA, Inc.’s financial education programs, estate planning & investment advisory (www.certa.ph). He’s also a Real Estate Broker, author of the award-winning personal blog– www.vernongo.com; Vice Chair – www.cebucontentcreators.com
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Originally Published in Philstar - The Freeman Newspaper last August 15, 2017.

Saturday, August 12, 2017

Estate Planning is not just about Estate Taxes

Saturday, August 12, 2017 Posted by vernon go , , , , ,

“Prosperity is a blessing from God, but it can also become a curse if not handled properly.”

We’ve had some interesting (and sometimes horror) stories from our clients with regards to estate planning. The usual top two problems in such a situation are (1) liquidity - where to get the money to pay the local transfer tax and estate tax due; and (2) securing a new Transfer Certificate of Title and/or tax declarations for the heirs when there are real properties involved.

With foresight, these can be avoided, here are some Estate Planning tools that may be considered in addressing the problems mentioned above:

·         Will – this is the commonly known tool even by the masses; it is basically a written document to identify what you like to be done with your assets upon death.
o   Pro – for young couples, this is sufficient or for those with few assets
o   Con – will still undergo probate and have corresponding fees
·         (Durable) Power of Attorney – designation of access and control of your financial assets
o   Pro – when children are young and require some guardianship.
o   Con – Blood is thicker than water, but money is thicker than blood.
·         Prenuptial Agreement – an agreement to separate assets
o   Pro – if you have significant personal assets; for second marriage
o   Con –culturally sensitive for Filipinos (What is mine is yours and yours is mine?)
·         Life Insurance – Life insurance planning discussions focus on estate tax mitigation, estate liquidity and estate equalization. And is commonly pushed by “Financial Salespersons.”
o   Pros – A way to pay taxes without having to disturb the actual assets to be passed on to heirs.
o   Cons – (1) too old (uninsurable/sickly); (2) Over-covered; (3) does not address other issues of the estate.
·         Gifting/Donation – Wealth can be transferred over-time to family members (others too)
o   Pro – I call this strategy “Dying a pauper,” wherein you potentially have zero assets upon death (if you give it all)
o   Con – (1) you pay donor/gift taxes while living (2) timing can be an issue; we don’t want you to give away your house early-on, only to be kicked out later and become homeless
·         Family (Holdings) Corporation – transferring of personal assets to a business entity
o   Pro – wealth can be kept within the family (excluding in-laws & the like)
o   Con – (1) set-up and transfer costs; (2) heir-rivalry later (3) loss of personal control
·         Business continuity and succession planning – Estate planning for business owners is significantly different than those who are not.
o   Pro – (1) train successor for business continuity; (2) Initiate harmony among heirs by equalizing ownership
o   If not done, (1) potential court litigation among heirs & costs; (2) broken families; (3) Death of business

There are more tools not included here. However, an “Estate Plan” shows you the bigger picture and encompasses all the tools mentioned above to determine the best path for you to take with regards to your objectives.

We often hear the phrase, “that will never happen to our family; we are all at peace with each other.” One should never assume that your heirs will live happily ever after when your time is up.

“The best way to predict the future is to create it.” – Abraham Lincoln

Disclaimer: This is for general information only and is not a substitute for professional advice.

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The writer is an RFP® –Registered financial planner and helps people through CERTA, Inc.’s financial education programs, estate planning & investment advisory (www.certa.ph). He’s also a Real Estate Broker, author of the award-winning personal blog– www.vernongo.com; Vice Chair – www.cebucontentcreators.com



Wednesday, August 02, 2017

Set it and (Mostly) Forget it Investing [3]



With the evidence overwhelmingly in favor of passive investing for the long-term, why won't more institutions embrace these facts and shift their focus to advising clients on the benefits of index investing?

One reason: there’s a lot more money to be made by keeping the lie alive. The fees and commissions earned through active investing are considerably higher than passive (index) investing.

Index funds will achieve returns that are much closer to the market averages than the active funds that “try” to beat the market, and there lies the difference since even experts find it very difficult. This makes low-cost index fund investing an above average portfolio strategy.

"Investing should be dull. It shouldn't be exciting. Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas... it is not easy to get rich in Las Vegas... or at the local Merrill Lynch office." - Paul Samuelson, Nobel economist, excerpt from Paul Farrell’s ‘The Lazy person’s Guide to Investing’

Modern investing has become too complex for ordinary investors to really understand and profit from. Also, most lazy investing portfolio I have researched are practically US-focused or have multiple asset class combinations and not much for our local reference/use other than fund-based-investing.

On Asset Allocation
There’s more to the market than just stocks, and a good portfolio will usually include a few different types of investments. This may include real estate but I won’t include it as it is capital intensive and not ideal as a beginner investment. How much of each depends on your age, risk tolerance, and investment goals. A common rule of thumb is: [110 - your age = the percentage of your portfolio that should be stocks]

So, if you’re 30, you’d put 80% of your portfolio in stocks (110 - 30 = 80) and the remaining 20% in lower-risk bonds. If you’re more conservative, you may want to put 30% in bonds instead.

Getting started
1. Open an account and choose a low-cost index fund (Fund Supermarket, Bank, Investment House, Insurance); a simple rule is to compare the expense ratios, the lower the better.

2. Choose or figure out an Asset Allocation (See a quick summary below):

• 20 y.o. – 90 percent stocks, 10% Bonds

• 30 y.o. – 80 percent (Index Fund stocks), 20 percent Bond (Funds)

• 40 y.o. – 70-30

• If you don’t feel that you should be putting more into bonds/stocks, put that 10 percent or 20 percent as Cash positon

3. Establish a habit of (or Automate) savings-to-be-invested or make sure you allocate at least 10 percent of your income; contribute regularly and re-balance annually.

Once you’re done, forget about it! The idea is to set the allocations and leave them alone - not to time the market.

You can also substitute bonds for specific government issued (tax advantaged) investments such as: Pag-ibig modified fund 2, SSS Peso/Flexi funds and the recently launched PERA (our version of the US 401k & IRA accounts although our is not mandatory).

Keep it simple, cheap and stick to the plan through thick and thin.

Disclosure: I am invested in one index fund and a dividend-yielding mutual fund as well as a VUL-index-fund. This is not a solicitation or investment advice and is for informational purposes only.

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The writer is an RFP® - registered financial planner and helps people through CERTA, Inc.’s financial education programs, estate planning & investment advisory (www.certa.ph).He is also a Real Estate Broker, author of the award-winning personal blog – www.vernongo.com and an Instagram travel-micro-blogger (@PhantomNomad).
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Originally Published in Philstar - The Freeman Newspaper last August 01, 2017.

Wednesday, July 26, 2017

Set it and (Mostly) Forget it Investing [2]



In my last column, I talked about the index fund and also mentioned Warren Buffet’s views on it. After studying, researching, reading a-lot-of-finance-business books, paying for expensive training and certification on Financial Planning, only to end up advocating a “Lazy Investing Way” is pretty weird.

Whenever you do anything, you should ask yourself: “Do I want to do this every day for the rest of my life?” Usually, the answer is NO. That means you want to try to minimize or eliminate that task entirely.And after seeing that suggestion from Mr. Warren Buffet himself, that pretty much sealed the deal in my pursuit of Lazy Investing.

Note: If you don’t know who Warren Buffet is, he’s one of the richest men in the world and it is not hard to argue him being the greatest investor the world has ever seen.

I’m not saying you shouldn't buy individual stocks. If (and this is a big "if") you have the time and desire to properly research companies to invest in, and are committed to building and maintaining a well-diversified portfolio, go for it.

My point is that most investors don't have the time, energy or desire to do all of this, so the other option is fund investing. And simply buying a collection of businesses and letting them do the work for you is a far better option than paying hefty fees to some fund manager or spend a lot of ‘small accumulated’ expenses in doing trial-and-error by yourself through an online stock broker.

Let me start by defining what a pooled fund is, borrowing the definition from Investopedia.com: “Funds from many individual investors that are aggregated for the purposes of investment, as in the case of a mutual or pension fund. Investors in pooled fund investments benefit from economies of scale, which allow for lower trading costs per dollar (peso) of investment, diversification and professional money management.”

A pooled fund can be private (those from investment clubs/groups, partnership, trusts), Mutual Fund (Investment Companies), UITF (Unit Investment Trust Funds – from Banks), ETFs (Exchange Traded Funds in the Stock Market) or even a the investment portion of a VUL (Variable Life Insurance).

Each of these types of fund have their advantages or disadvantages (which you can research by yourselves), but all these funds have what we call an “Index Fund”. An index fund is a type of fund with a portfolio constructed to match or track the components of a market index, like the PSEi.

The Index Fund intends to achieve for its participants investment returns that track the performance of the Philippine Stock Exchange Index (PSEi) by investing in a diversified portfolio of stocks comprising the PSEi, and aims to provide a return that tracks the performance of the PSEi.

You are basically invested in the top companies in various industries in the Philippines. And you can invest for as low as Php5,000. Oh, and make sure that it is a ‘low-cost index fund’ and also take advantage of automation as well (auto-savings or easy investment plans; the bank/fund house/insurance provider should have this option for you!).

Disclosure: I am invested in one index fund and a dividend-yielding mutual fund as well as a VUL-index-fund. This is not a solicitation or investment advice and is for informational purposes only.

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The writeris an RFP® - registered financial planner and helps people through CERTA, Inc.’s financial education programs (www.certa.ph).He is also a Real Estate Broker, author of the award-winning personal blog – www.vernongo.com and an Instagram travel-micro-blogger (@PhantomNomad).
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Originally Published in Philstar - The Freeman Newspaper last July 25, 2017.

Wednesday, July 19, 2017

My list of Earthquake Hugot Posts! #Nabasakolang

Wednesday, July 19, 2017 Posted by vernon go , , , ,

We should not joke about earthquakes. But the young Filipinos seem to always find something humorous out of difficult situations. I guess we sometimes just can't help crack a joke in the face of despair and danger.

Let's start this with the following sequence: English, Taglish(?), Tagalog then Bisaya quotes or maybe let's just mix up the various #overheard and #NabasaKoLang na #EarthquakeHugot:

"This is your time to chat with your crush by saying 'stay safe!'" >_<

"Stay safe ka d'yan; nung safe ka sa akin hindi ka nag-stay!"

"Stay-safe mo mukha mo! Ikaw nga di nag-say eh!"

"Earthquake nga hindi mapigilan, eto pa kaya nararamdaman ko sayo?"

"Hindi ko man lang naramdaman yung lindol dahil sa heartache na nararamdaman ko!"

"Buti pa yung lindol, naramdaman ko. Yung pagmamahal mo sakin, hindi."

"Lindol ka ba? Kasi niyanig mo mundo ko."

"Walang wala ang lindol nang dumating ka sa buhay ko, you rock my world kase."

"Malakas daw yung lindol? Di nga! May mas lakas pa ba sa lindol ng puso ko sa tuwing nakikita kita?" #Ayee

"Naramdaman mo yung lindol pero yung feelings ko di mo maramdaman."

"Lumindol na lahat lahat, hindi mo parin ako gusto?"

"Bakit yung lindol, diko maramdaman? Pero yung sakit, damang-dama ko parin?"

"Ako nga sa tabi mo hindi mo naramdaman eh lindol pa kaya?"

"Bigla-bigla kang magpaparamdam, yayanigin mo mundo ko, at sa pagkawala mo, pighati at pagkawasak ang iniwan mo!"

"Buti pa yung lupa, kinikilig!"

"Lumindol daw? Hindi ko naramdaman, katulad nung hindi mo pagramdam sa feelings ko."

"Masyado ka kasing manhid, kaya di mo naramdaman na lumindol."

"Naka-move-on kana kasi kaya di mo na maramdaman"

"Malakas daw yung intensity at magnitude ng lindol, gaya ng pagibig ko sayo!"

"Buti pa yung lupa, gumagalaw...ramdam. Ikaw kahit konting movement wala man lang."

"Sa sobrang lakas ng lindol, pati puso ko nabiyak."

"Ganito ba talaga ang epekto mo sakin? Pati kasi mundo ko nayayanig mo!"

"Para tayong earthquake drill: Kahit nagseseryoso na ako, wala ka paring pakialam."

"Hindi ang pagyanig ang nakamamatay. Kundi yung mga bagay na posibleng mahulog sayo." #AWW

"Umalis ka na sa buhay ko! Huwag ka na magparamdam kung mawawala ka lang agad!" #Aftershock

"Kaloka ang lindol. May pinagpipilian ng pwedeng pakiramdaman."

"Sa sobrang numb ko, nawalan na ko ng feelings." :(

"Alam mo ba kung bakit lumindol? Sumigaw kasi ako ng CRUSH KITA! Kaya hayun, kinilig yung earth."

"Yung aftershocks nga di mo ramdam, effor ko pa kaya??"

"Maypa ang linog naay status...kita? Nganga!" #Boom

"What's scary is you won't know how long it;s gonna last.."

"What's even scarier is that you won't know when you would feel it again.."

"It's always scary to fall, you get dizzy, you get hurt and sometimes you won't even know that somethings will fall unto you!"


"What earthquake? Those were the tremors of my heart that's being torn to pieces because you like someone else."


That's about it for now, but I'll make sure to add or update this post every now and then. AND ALSO LASTLY, Earthquakes are something we should not joke about, so make sure to be serious during earthquake drills; just like in a relationship.

Tuesday, July 18, 2017

Set it and (Mostly) Forget it Investing [1]



When a lot people think of investing, they imagine painstakingly picking individual stocks, tracking their daily performance and constantly buying and selling.You could pour in a lot of time, effort, money or you could hire a financial planner to do this for you, but the fact of the matter is that most of the time, it is difficult if not impossible to beat the market.

You can work hard or work smart. Most smart investors try to match the market, which, over a long period of time, tends to improve. Past performance isn’t an indicator of future performance, but following the index can still yield solid results!

Many refer to this as “buy and hold” or “set it and forget it” or even lazy investing — because it requires little effort and you don’t have to constantly track your portfolio. You may have to check in once a year or so, but it takes minimal work, and you can mostly leave it alone. This is perfect for 'normal folks' or people who aren't fans of calculations and the like.

In a 2014 letter to Berkshire Hathaway’s shareholders, Warren Buffett explained a simple investment strategy (see: http://www.berkshirehathaway.com/letters/2013ltr.pdf):

“She’s going to have more money than she needs,” Buffett said. He would deliver cash to a trust for his wife’s benefit upon his death, with instructions to put 10 percent in bonds and 90 percent in index funds, preferably from mutual-fund house Vanguard Group.

“Most investors, of course, have not made the study of business prospects a priority in their lives. If wise, they will conclude that they do not know enough about specific businesses to predict their future earning power. The goal of the non-professional should not be to pick winners – neither he nor his ‘helpers’ can do that – but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.”

Similar advice applies to nearly anyone. Investors great and small can see wealth eroded by commissions, fluctuations in specific stocks, or even corrupt advisers since most active mutual-fund managers fail to outperform the broader stock market over time, he added.

Human behavior won’t change. Wealthy individuals, pension funds, endowments and the like will continue to feel they deserve something “extra” in investment advice. Those advisors who cleverly play to this expectation will get very rich. This year the magic potion may be hedge funds, next year something else. The likely result from this parade of promises is predicted in an adage: “When a person with money meets a person with experience, the one with experience ends up with the money and the one with money leaves with experience.”

Of course, there is no best portfolio for any investor. The best lazy portfolio is the one you set up in line with your risk tolerance, preferences and goals. Set up your investment allocation, rebalance every year, then sit back and go about living your life or pursuing your goals and dreams. It’s likely your investments will do just fine over the long-term.

Disclosure: I do not have shares in any of the companies mentioned. This is not a solicitation or investment advice and is for informational purposes only.

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The writeris an RFP® - registered financial planner and helps people through CERTA, Inc.’s financial education programs (www.certa.ph).He is also a Real Estate Broker, author of the award-winning personal blog – www.vernongo.com and an Instagram travel-micro-blogger (@PhantomNomad).
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Originally Published in Philstar - The Freeman Newspaper last July 11, 2017.

Monday, July 17, 2017

Initial Coin Offering (ICO) bubble?

Monday, July 17, 2017 Posted by vernon go , , , , ,


There’s a lot of buzz online about the various cryptocurrencies popping up lately. And this event is being cause by the ICO or the Initial Coin Offering, which is similar to the IPO – Initial Public Offerings in the stock market.

What is an ICO? It is not a security, at least not one that resembles any security that existed more than 5 years ago. I suppose you could call them commodities that are purchased overwhelmingly for speculative reasons to say the least.

These ICOs are based off of Ethereum. Ethereum is a blockchain protocol very similar to Bitcoin, but unlike Bitcoin it supports sophisticated forms of transactions known as smart contracts. These are simple programs that define when, how, and in what manner ETH (the name of the native token on the Ethereum network) is distributed. This flexibility allows one to create new tokens on top of the Ethereum platform very easily. And it is these tokens or “coins” that are being speculated on in this bubble.

These coins are sold as vital parts of as-yet-undeployed decentralized mechanisms which are “expected” to be useful at some point in the future, and their tokens are claimed to extract rent or value from the people who will use these services.

As an Industrial Engineer, Financial Planner and also as someone working in the IT-BPM industry, I’m a fan of these concepts and it’s potential in the future. But the current scenario is that people are thinking of these as ‘investment’ while they are obviously not. Although it is true that you can make money out of it, but speculation often leads to a lot of wealth lost or gained, that makes it no different from gambling really.

This isn’t anything new and in the stock market, stocks that play float manipulation games generally become juicy targets for short-sellers.The world is filled with people who know the price of everything but the value of nothing.

I've researched these coins to some extent and I think BTC, LTC, ETC (Ethereum Classic) all have great use and functional cases. Ethereum and all of the ICO ponzis built on top of it are useless.

Let’s consider the ICO process:

Suppose I make a new coin called Awesome Coin. I pre-mine all of the coins at a cap of 100,000,000 coins and at the initial offering only make 10 coins available. Then like IPOs, I create a marketing campaign and create a sort of demand to get enough people to throw money into it through a trading platform. After that I start selling 1 of the coins for $10. Awesome Coin will now have a $1 Billion market cap. The next coin, I sell for $11 and now Awesome Coin becomes a $1.1 Billion market cap. Then let the perceived demand and supply kick-in (heck let greed kick-in); repeat the scenario at varying prices.

The people who created the ICO earns money guaranteed. The folks running the trading platform is also guaranteed to make money so long as the trading activities continue. But the individual hyped investors or traders? They are at the mercy of the hype.

Remember, in the world of speculation, you are not valuing something so much as you are speculating on the perception of value.

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The writeris an RFP® - registered financial planner and helps people through CERTA, Inc.’s financial education programs (www.certa.ph).He is also a Real Estate Broker, author of the award-winning personal blog – www.vernongo.com and an Instagram travel-micro-blogger (@PhantomNomad).
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Originally Published in Philstar - The Freeman Newspaper last July 4, 2017.

Sunday, July 02, 2017

When does 'Real Estate' become an Investment?

Sunday, July 02, 2017 Posted by vernon go , , ,


Buying real estate is about more than just finding a place to call home or buying any so-called ‘hot property’ that’s being marketed by salespersons. Although the real estate market has plenty of opportunities for making big gains, buying and owning real estate is just as complicated as investing in stocks and bonds.

So, when can you say that a real estate purchase is an investment? Most of the time, it depends on one’s definition. Here’s the definition I subscribe to:

"An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return." - Benjamin Graham and David Dodd

That definition is from one of the mentors of Warren Buffet and was focused on stocks and bonds type of investments, but I believe the same can be applied in real estate.

I subscribe to that definition because it implores you to at least do the necessary due diligence to ensure a certain ‘margin of safety’ when investing. This is because most people just think of investing in real estate by simply buying a property anywhere and rent it out or wait for it to increase in value in order to make money. This is where having an insider’s view of the market is important, knowing which areas are hot or not.

A real estate becomes an investment when it’s primary goal or purpose is to generate income or profit.

Real Estate Investments

Rental properties – People think this is easy, but it’s not (marketing, property maintenance, collections, security, taxes and the like). Here are some ways to rent-out properties:

* Boarding house for students or professionals to stay in.

* Have the land rented out for at least 25 years or so.

* If you have an oddly shape property beside a road, you can build a billboard and rent out ad-space.

* DevelopIndustrial or IT zones where they rent out the land, or they create their own building, and rent that out to companies (outsourcing, warehouse).

* Another way is to buy a ‘condotel’ type of property (a condominium project operated as a hotel) where you buy and own a condo unit that is rented out. The property management company does all the work for you while you just collect your share of income.

Real Estate Investment Groups - Like rental properties, this can take various shapes.

* This can be as straight forward as becoming a Real Estate broker/sales persons and sell real estate from developers

* You can invest as a corporation and make a Property Management company

* Become a real estate developer, buy-sell and develop properties

* Group investment – a group of people pool funds to buy-sell properties or to develop a property and then rent it out while splitting the profits

Real Estate Commerce – strategic buying and selling of properties

* Flipping – you buy undervalued (or maybe foreclosed ones), provide improvements and then sell it

* REITs (Real Estate Investment Trusts) - is created when a corporation (or trust) uses investors' money to purchase and operate income properties. REITs are bought and sold on the major exchanges, just like any other stock and must pay out dividends.

As with any investment, there is much potential and risk, and gains are not assured all the time. Make careful choices and weigh out the costs and benefits of your actions before investing!

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The writeris an RFP® - registered financial planner and helps people through CERTA, Inc.’s financial education programs (www.certa.ph).He is also a Real Estate Broker, author of the award-winning personal blog – www.vernongo.com and an Instagram travel-micro-blogger (@PhantomNomad).
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Originally Published in Philstar - The Freeman Newspaper last June 27, 2017.

Wednesday, June 21, 2017

The endowment effect in investing

Wednesday, June 21, 2017 Posted by vernon go , , , , ,


In behavioral finance and social psychology, it is a cognitive bias known as The Endowment Effect. In short and simple words, this effect means that, we as humans, have a tendency to (over-) value things we currently own more than we would value them if they were somebody else’s.

First postulated by Richard Thaler in 1980, the endowment effect is one of the first cognitive biases observed to violate standard economic theory. The endowment effect states that 'people often demand much more to give up an object than they would be willing to pay to acquire it' (Thaler,1980).

We naturally exhibit a tendency to be lenient on evaluating the performance of what we own. Investors, therefore, tend to stick with certain assets because of familiarity & comfort, even if they are inappropriate or have become unprofitable. The endowment effect is an example of an emotional bias.

That car you have that constantly breaks down?  You’d never buy it from someone else, because better ones are on the market right now.

That crappy job you’ve stayed in for years?  You probably would never take it again if you knew what you know now because you know that there are better ones out there on the market right now.

The endowment effect has immediate implications for investors. Simply put, the cognitive tendency to 'love what you own' applies to the shares, bonds, and funds in your portfolio which leads us to scrutinizing less our choices and even our investment portfolio. In many cases defending them irrationally–than you otherwise would.

Is it Good? Bad? Both?

The endowment effect isn’t all bad. It allows us to have some comfort in difficult times.  How many times have you heard people justify their current awful situation as a “blessing” when pretty much anyone else would say it was a curse?  That is, at least partly, the endowment effect in action.

But, on the downside, the endowment effect has a highly insidious effect on your career, finances, relationships, etc.. You “stick” in bad situations, investments, relationships, and jobs longer than a “smart” person would, because your brain is wired to make it so. This is also the reason why people tend to hoard or also the Real Reason It’s hard to get rid of things.

It seems this is already hard-wired into us as this same bias has helped our ancestors survive and reproduce; in a very dangerous environment; it is better to be risk-averse and live to see another day than to take a chance and die, and over-valuing what you already have probably made sense in an environment where acquiring desirable things was much harder than it is now.

Recognizing the existence and power of these biases is the first step to overcoming or perhaps at a basic level – being able to spot and control them.

For every type of investor, it is important to be mindful of the ‘endowment effect’ and judge the various financial products you currently own versus what is available in the market impartially as best as possible, especially when you already own one or more of them.

Where does the endowment effect show itself in your life and experience?  Please do share!

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The writeris an RFP® - registered financial planner and helps people through CERTA, Inc.’s financial education programs (www.certa.ph).He is also a Real Estate Broker, author of the award-winning personal blog – www.vernongo.com and an Instagram travel-micro-blogger (@PhantomNomad).
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Originally Published in Philstar - The Freeman Newspaper last June 20, 2017.