ARE YOU AFRAID OF THE STOCK MARKET? (Here’s Why You Shouldn’t Be)
Do you invest in the stock market? If you ask this question, chances are majority will say no. Some may say, “I did and got burned!” or “I don’t like because that’s too risky, my friend lost millions in the stock market!” And there is no doubt that majority of the people who probably tried investing in the stock market lost money. So being afraid to put your hard earned money in the market is just normal.
I have been investing in the stock market since I started working back in the mid 80s. So far, I have experienced some bull runs, crashes and of course the day-to-day (in fact minute-by-minute) fluctuations in stock prices. I have experienced the highs of immediate gratification when stock prices shoot up minutes after buying the stocks, the pulling of hair equivalent when the prices dive seconds after my purchase, and the feeling of “Sayang I sold too soon!” when the stock shoots to its peak a few minutes after selling. Haay… those were the heady days of my young chupita years. (Chupita is the term we use for quick trading of stocks which is a high risk and high return activity.)
Now after decades of investing, I have come to realize that doing it regularly in selected sound companies over a period of time is the best for me. It might not be as exciting as chupitas but it definitely gives me a better yield and sounder sleep at night. In fact, I believe that everyone should invest in the stock market.
Now let me try to explain why it’s good to invest in the stock market, the way my husband and I explained it to our three sons when they were very young. And I mean really young, as in grade school and preschool.
- Putting all your money in your “small account” is not going to earn you a lot of money. (We used the term small account to refer to their savings account with ATM card for easy understanding.) Your small account does not really earn interest because it is something that you can easily withdraw through ATMs, so the bank cannot really do much to earn from it; consequently, it cannot pass on a good interest rate to you.
- You can earn a bit more from your “big account.” (We used the term big account to refer to their higher earning investments such as time deposit, money market placements, etc.) Your big account earns more because you cannot easily withdraw it from an ATM and this gives the bank some time to do something and earn from your money; consequently, it can share this earnings with you by giving you an interest rate higher than your small account.
- BUT there is this thing we adults call inflation which beats the earnings of your small accounts and sometimes even your big account. Inflation is the general increase in the prices of the things we buy. A cone of ice cream today costs more than it did last year, and this increase happens year after year after year. This happens to all the goods and services we pay for and the rate of increase (inflation) is higher than what you earn from your small and big accounts! So what happens if you just put all your money in your small and big accounts? What you can afford to buy now, you may not be be able to afford to buy years from now. This is what we call a decline in your purchasing power. So putting all your money in these accounts is actually risky!
- To beat inflation, you must invest part of your money in something that grows faster than inflation. These investments also have risks and unlike your small and big accounts, the principal amount (your original investment) may sometimes be eaten up at some point during your time of investment. You can invest in a business that you will run, or in real estate whose value will increase in the future. To have a successful business, you should be an adult, you should have the skills and the time to run it well. Of course you should have enough money to put it up and to take care of the expenses because most businesses take a while before they start earning. On the other hand, buying and selling real estate requires a lot of money, and again, you have to be an adult to do this transaction. Most of the time it’s also hard to find a buyer for your property if you need to encash it.
- The STOCK MARKET is an alternative investment for growth which is available to you now! While you are still a minor, your parents can open an account in trust for you.
Here are the advantages of investing in the stock market:
- You become business partners with the Ayalas, Sys, Gokongweis, Tan Caktiongs, MVP, et al. Isn’t that cool? You are actually investing in a business and you can afford to have more than one business!
- The difference is that you don’t run the business and they call the shots because they have more shares than you do. But c’mon don’t you think it’s safer and better for your investment that they call the shots? Maybe later when you get older and have this really great idea and develop really great skills to run your own show, you can.
- You can buy when you’re ready and in the amount that you’re willing to invest.
- You can do your investments over a period of time, as in over your lifetime!
- You can sell as soon as you wish – when you want it, how much you want it for (provided there are buyers). The buyers and sellers are somewhat easier to find here than in the real estate market. This is what we call “liquid asset.” It is easy to encash the asset when you need it.
- You may buy real estate stocks instead of buying the real estate asset itself.
- The taxes you pay in the stock market are lower.
- Historically, the long term growth in stock market investments is significantly higher than fixed income (the small and big accounts) and inflation. So this means that your purchasing power years from now will even increase.
But as a word of caution, here are the things that you should remember when investing in the stock market. Here’s how you can avoid being part of the statistics (over 80% of those who trade in the stock market lose money).
- Have fun but keep your calm. Mr. Market, a term used by Benjamin Graham to refer to the fluctuations in stock market, is very fickle minded and easily excitable and sometimes irrational. (Benjamin Graham was the mentor of Warren Buffet, the greatest investor of all time). You should not imitate Mr. Market. Once you’ve decided in investing in a stock because it is a good company at a reasonable price, be happy with your purchase. For instance, you purchased some SM shares then there was a shoot out somewhere and Mr. Market became jittery that it was valuing your SM shares too low, should you sell? No, in fact if you have extra cash, you should buy more. Why? Do you think Mr. Sy will close shop because of that isolated shooting incident?
- Consider it as a long term investment to maximize returns. Don’t use the cash for your expenses for next month or your tuition fee next sem. If you are still living with your parents for free, then you can afford to invest almost all your money in the stock market to maximize your investment return.
- Invest over a period of time. No one can really predict the stock market and probably that makes it more exciting. So when people ask, when is the right time to get in the market? The answer is any time as long as you do it regularly. Set aside a percentage of your cash inflows and invest in your selected stocks. This will allow you to have a good average cost in your stock purchases.
- Invest only in sound companies with reputable management. It’s true that there are some wild and exciting opportunities in speculative stocks but you are also taking a lot of risk in participating in them.
There are still so many interesting things to say about investing in the stock market but let me stop here so I won’t overwhelm you. I know I promised earlier to explain it the way we did to our sons when they were very young.
I hope by now, the scare or the fear factor has been eliminated or at least diminished. Let’s remember that not investing for growth is the real risk in preparing for our future!