Protecting and growing

Times are tough all over the world, and many have had to re-evaluate their spending, savings and investments in a more decisive way than ever before. Miloš Filip, chartered financial analyst and sales and marketing director at ING, has seen many people through recessions and difficult financial situations while at ING, but even he said he's never seen anything on a massive scale such as the current financial crisis. And although many are still struggling, he said there is always a silver lining, and advises clients not to bury their heads in the sand.

The Prague Post recently sat down with Filip to discuss investment behavior in the current economy and how people can better plan for the short and long term and, regardless of the market, to not give up.

The Prague Post: Have you experienced anything similar to this financial crisis before in your position?

Miloš Filip: We have experienced problems in financial markets similar to this in 2001 and 2008. What is different in 2011 is the global scope of the problems that are rising in different regions and the different sectors be it financial or sovereign debt issues. This is perhaps the first global crisis on this scale. In previous years, there were difficult situations, but it was limited to certain sectors of economy or securities. In 2001, it was the issue of the bubble exploding in technology, media and telecommunications shares so the capital market was hit. In 2008, it was sub-prime crisis issues with the securities mostly related to mortgage markets, so that was in a sense limiting, too. Today, we see the problems have moved to the eurozone's sovereign debts previously considered as more or less a safe haven and to holders of these debts, which are mostly financial institutions. Through thick financial wires between the United States, Europe and Asia, these problems increased and became an unintended consequence of the globalization.

TPP: How have you prepared people for this crisis?

MF: We were preparing investors for difficult and volatile situations. We were quite cautious and just taking into account that these sovereign debt issues were built some time ago in the '80s or '90s. The crisis made them worse and more visible.

We were mostly trying to prepare clients through communication and advising that there are different market scenarios that could steer the development of the economy. It was clear that certain scenarios such as a so-called V-shaped recovery wouldn't materialize in 2010. We were encouraging people to take a long-term view for private investments and not to chase the performance of different assets, but to try to realistically look at their investment goals and constraints, such as their risk ability. This crisis occurred too soon after 2008, so people aren't being as dynamic with their investments. It could be a problem for people who have 10 years before they retire because this should be their most rich and aggressive harvesting time. In the Czech Republic, people are more conservative with investments; they don't like to take risks. People stick with bank accounts and conservative funds, which is a good strategy in the short term, but not in the long term, because the return minus inflation will not be as great.

TPP: What should people do with their pensions, if they have them?

MF: We are advising to reassess the sources of your income, your savings and the risk profile of your investments. People should have different pots. For example, with pension, there is one pot that is state pension, second is pension funds and the third should be personal investments. The risk and return characteristics should match your goals. If you live on a three- to five-year horizon, then obviously there is no time to be a hero in these volatile conditions. If your investment horizon is longer, then you should stick to some sound investment strategy and not worry too much.

TPP: How do you advise people with their debts and how to manage them?

MF: We show investors how to manage their debts, what is a good or bad loan to take and advise them of what proportion of their income the debts should be paid off with. We explain that a mortgage is a good debt since it is an acquisition of an asset as opposed to debt on your credit card for Christmas gifts, which is nonsense because of the huge interest rate you will pay. What is the goal for which you take the debt? With a mortgage, you are purchasing a home or office, and it makes sense to have that debt. A bad loan or debt is when you consume and you're left with the loan and you still have a couple of years to pay for a gift or a TV in your living room.

TPP: Are more people being conservative or are there still some risk takers?

MF: I think more people are being conservative, especially in this part of the world. For example, we did some research at the beginning of the year and we saw immovables like houses, jewelry, pension funds and bank deposits were the favorite for everyday clients. More sophisticated clients look at money market and bond funds, but only a few, about 10 percent, have goals with equity and dynamic investments. It could be connected to our situation in the Czech Republic. First, people have quite low financial literacy, and second, our income is increasing, but compared with developed markets, it's low. So the asset base is lower.

TPP: How should people invest for the short term and the long term?

MF: I think people should, even though not many people do, invest through sound financial planning. It's not in our genes to be good financial planners, but investment research shows that if you do only a bit of money planning, you will be better off than those who don't. Planning should be about judging your personal situation and your goals, be they retirement, a child's education or purchasing a home. These life goals are connected to your money and require more financial planning than they did a couple of years ago. You should reconsider your investment profile and not chase the up and down market. The worst is to stop investing and do nothing. A real appreciation of your savings should be the manageable goal for people. If we have one certainty, it is that we have a definite year that we retire, and we should all have a financial pot or household treasury that should help us with pension expenses during retirement. It's not enough to save the current average pension savings per month of 409 Kč per person. I think people need to save at least 10 percent to 15 percent of their monthly paycheck. That should secure you in any scenario based on what we've dealt with in history. If you save less, your assets may not grow enough. It also means you rely on future returns, and you can't do that in this environment. Current state pensions will be low, and even the Czech Republic will be running a deficit in the long term. We are running out of time and running behind expected payment for the future and that's a global issue, not just here.

Megan Battista can be reached at
features@praguepost.com