By Maya Baltazar Herrera

Monday this week, trading began afresh after over a week of holidays. Equity as well as bond values are trading modestly higher from year-end 2007 rates.

As I write this, the local equity index is trading at about 1970, 7 percent above its year-end 2008 value of 1858. Meanwhile, the Mart1 yield on 10-year treasuries was tracking slightly down at 7.3 percent from its year-end 2007 level of 7.44 percent. Now, since the value of a bond goes in the opposite direction of yields, what this means is that anyone holding a 10-year bond would have seen the value of his bond rise about 1 percent just in the first week of this year.

Of course, compared to the value lost in 2008, a 7-percent rise seems small. After all, the local equity index fell almost 50 percent last year, from 3622 at the end of 2007. Actually, even the 10-year bonds would have lost about 6 percent in value in 2008 as yields had risen almost 100 basis points from 6.58 percent to 7.44 percent.

As the end of the first working week of the year nears, it seems a good time to revisit long-term financial plans and current investing strategies.

Magic number

Two things are important in every plan: the goal and the current outlook. Once these two things are understood, a plan of attack can be prepared.

First, a review. If you have been investing your funds for a while, you know that any investment has at least three important characteristics: safety, liquidity and yield. The other thing you know is that, typically, yield goes in the opposite direction of both safety and liquidity. This means that, in general, the higher the safety or the liquidity (or both), the lower the yield. You probably also know that, in planning for the long-term, time is your friend. Time gives you more time to save and also gives your savings and investments more time to earn income.

What this means is that, the nearer you are to a major goal (such as retirement), the less risks you should be taking in your investments.

Also, quite clearly, the nearer you are to the farthest goal of retirement, the nearer you should be to your target retirement amount. I call this the magic number. The funny thing is many people actually don?t know their magic number. I actually read somewhere that at least a third of adults have a severe misunderstanding of how much they really need for retirement.

So here?s a quick way to do that. First, make an estimate of how much money you would spend in a year if you were retired. You can do this in current pesos. Then, project this with interest. You can use a computerized worksheet, a calculator or interest tables - such as the sample one I have provided here. For example, if you think inflation is going to be 5 percent and you are 15 years away from planned retirement, then instead of P1 million in today?s pesos, you will need P2.08 million a year when you retire.

Now, you need to translate this amount in the total number you need in order to retire. There are sophisticated ways to do this but here is a quick, back of the envelope approach. First, figure out your real return, i.e. how much investment income you can earn on top of inflation. For example, if you believe inflation will be at 5 percent and you think you can earn a net investment income of 7 percent, that means you have a real return of 2 percent. In fact, many calculations assume you can make anywhere from 2 percent to 4 percent real return.

Now, all you have to do is take your inflated annual requirement and divide that by your real return. If your expected real return is 4 percent, then this means you will need 25 times (25x) your annual requirement. So, for our hypothetical 2.08 million inflated annual requirement, the magic number is about 52 million.

This calculation assumes that you keep principal intact, grow your principal with inflation and spend only a portion of investment income. The great thing about this approach is that that principal amount becomes a source of money for such things as final medical expenses and eventually, estate taxes.

Onward

Once you have your magic number, the next step is to figure out how much savings you have towards retirement and how much more you need to save.

A few caveats. Usually, you can?t count such things as jewelry or furniture or cars or even your house in savings. The reason for this is that you don?t earn interest from these things and you won?t sell them at retirement. Second, you must have separate savings plans for each goal. Major goals include college funds for each child and money for major travel or for a new house.

Once all your goals are set and you know how much you have set aside for each goal, you need to figure out how to reach the goal. This consists of two things: how much to set aside as savings regularly and how to invest the money.

We?ll do more of that next week but I will leave you with this. When you decide where to put your funds, the question should never be about the past. Rather, it should be about the future.

For example, the local equity index rose from 2096 at end of 2005 to 2983 at end of 2006 to 3622 at end of 2007. Did that mean that the index would continue to rise in 2008? Actually, at the end of 2007, there was still much concern about continuing effects of what was then known still being called the subprime crisis. Steady heads actually advised caution. Today, the index is at about 1970?just a little above the 2004 level of 1823. The question to the wise investor is this: Where do you think the index will really go? And why?

Readers can e-mail Maya at integrations_manila@yahoo.com. Or visit her site at http://www.mayaherrera.com.