As I write this piece, the market is trading at 6,800 levels, down 25% from its record high of 9,058.62 on January 29, 2018. To quantify the effect, someone whose portfolio was PhP1,000,000.00 in January just lost a quarter of a million pesos! In the vernacular he’d say, “Pera na, naging bato pa! Hindi na naman ako milyonaryo! Huhuhu!” ?
And that is why only a miniscule less than 1% of our population dares to invest in the stock market, despite recorded historical proofs of being the asset class that delivers the highest return in the long run. The rest of the population would say, “Hindi kaya ng powers (or sikmura) ko ang stock market!”
Those who conquered their fears and invested in the market may now be pulling their hair or doing the blame game and regretting their brave decision to invest in the market. If you are one of them, this piece is for you. It is also for those who are still thinking of finally starting their equity investing but are now thinking twice because of the blood they’re seeing on the streets.
Here are some pampa-kalma nuggets of wisdom to reflect on.
- The market will go up and the market will go down. Such is life. Life would have been simpler if the market moved in a straight line, but it does not, and such is stock market life. In fact, it is the asset class that’s most “hysterical” so to speak. Think about your circle of friends and family. Don’t we always have someone who’s so “exag” as in exaggerated? He/She is overly emo and yells, “The sky is falling!” at the slightest sign of challenge, and also overly optimistic and exaggerates accomplishments and possibilities. Benjamin Graham accurately used the allegory of the manic-depressive Market in his book The Intelligent Investor to describe the behavior of the market. It’s Mr. Market that made the prices of Globe and PLDT plummet just because there was a bidding for a third telco, and shot the prices of the possible players up so high, never mind how long it would take for a third telco to be up and running, and making money.
Reflecting on this reality of market fluctuations will hopefully make you decide whether you’d like to be the manic-depressive Mr. Market or the rational person who is investing in viable businesses through the stock market.
- Do not expect to sell at the top and buy at the bottom. “Magpakatotoo!” Yes, we all know that we should buy low and sell high, but really, who can predict the market accurately? Let me tell you this: Only hindsight is 20-20! I hate to burst your bubble, but this is true no matter what the self-proclaimed stock market gurus tell you. No one, I repeat, no one, can time the market perfectly! So the next time you hear someone try to sell you that notion, run away as fast as you can. Or if you want to amuse yourself, ask him to show you his portfolio! ?
Once you’ve accepted that you cannot predict the market, this is where the beauty of peso cost averaging comes in. If you just put in that “committed amount of investment” every month or so regardless of the market, you will effortlessly hit the low buying points and may even register better results compared to your stock market guru.
- Determine your risk appetite properly. And when I say this I mean, do not box yourself as a conservative or an aggressive investor simplistically. I find existing KYCs (Know Your Client) attempts to be inadequate because they just categorize the risk appetite of the person in one box. I believe that the way to categorize should take into account the purpose of investment. In other words, one investor should have more than one risk appetite, because he should be investing for various goals in life. His “investment bucket” for his child’s education who will enter college in let’s say five years should be different from his investment for his retirement in 25 years, and also different from his investment in emergency fund which may just happen anytime. (Yes, I still recommend investing your emergency fund in money market placements instead of keeping it in your ATM account, to avoid temptation of accessing this fund in not-so-emergency cases, and also earn interest along the way. Don’t worry, you only need one to two days to terminate this.)
So if we determine our risk appetite properly – i.e. realizing that we should have various “investment buckets” for different goals with different time frames, then we should all have investments in the asset class that gives the highest return in the long run. Now if the problem is “mahinang sikmura,” such that you think that “The stock market is hazardous to your health!” maybe you should switch off during times like this and just remember that your retirement (and other long-term investments) will not be needed in the near or even medium term so you can still have a good night sleep. Remember what John Bogle, the Father of Mutual Funds, said, “Don’t peek, don’t peek, don’t peek!” (If you want to know more about this, read Myopic Loss Aversion.)
- Asset Allocation is the most important decision in your investing. Yup, it’s not stock picking nor timing, but asset allocation that is most important in your investing. If you don’t believe me, go back to numbers 1 and 2. Again, you cannot control nor predict the movements of the financial markets, the economy, both local and global. If you still insist you can, go see a shrink! You may be suffering from something beyond the scope of financial advice. ?
Asset allocation is an investment strategy that aims to balance the risk versus reward by adjusting the percentages of asset classes in your investment portfolio. Whether you are aware or not, you are already implementing an asset allocation and this will play an important role in determining your asset accumulation and the standard of living you can afford in the future. If you insist on leaving everything in cash and cash equivalents “to be safe,” you can safely assume that your hard earned savings will be eaten up by inflation. On the other hand, carelessly putting everything in the stock market without regard for the money you need in the near term would really make you pull your hair, lose your shirt and pants in times like this.
If you do the right asset allocation, bear markets will not scare you to death because you do not have to sell at a loss to fund your near and medium term needs. At the same time, your proper equity allocation is hedging your future lifestyle from inflation. I have discussed asset allocation in a previous article including the proposed asset allocation of the investment greats such as Benjamin Graham, John Bogle, and Warren Buffet. (Click There is romance in asset allocation!)
- Automate to overcome your emo self. No matter how long you have been investing in the stock market, you may still feel butterflies in your stomach during times like this, losing 25% of your portfolio’s value in less than a year. During times when the market is high, you may still arrogantly feel you’re such a genius making all this money in the market. If you still require decision-making every month, “Will I invest now or later? Is it the right time? etc.” chances are, you will not be able to maximize the benefit of peso cost averaging. You will be tempted to delay investing when the market is down, and aggressively invest when the market is already peaking. Automating your investment will save you from yourself. Once it’s automatic, it will be a bit easier to sit back and relax come high or low market.
Remember, the combination of panic selling and irrational exuberant buying is never, never a good investment strategy. I hope the above points of reflection have calmed your nerves during these #LaglagMarketBlues moments. Have a chill investing!
- The biggest Catholic inspirational and learning event is finally here again! Kerygma Conference 2018: Limitless! Marvin and I are so excited because we will be sharing the stage with our bunso, Anton Fausto, in our talk “Parenting Challenges Made Fun”. We will be there on November 22 (Thursday) at 11:00am, SMX Convention Center, Manila. For tickets and more information, visit kerygmaconference.com
- I’ll be at the Bangko Senral ng Pilipinas’ 1st Financial Education Stakeholders’ Expo on Nov. 27-28, 2018 (Tues-Wed) at the SMX Convention Center, Manila. On Day 2, November 28 (Wed), I’ll be giving a talk on “Fin-Ed Program Design Using Behavioral Economics” and also moderating the plenary session on Innovations in Financial Education. I hope to see you there! ?
- Thanks to those who already bought the FQ Book, especially to those who took the time out to send me their feedback. Your feedback is food for my soul. To those who have not gotten their copy yet, here’s a short preview of FQ: The nth Intelligence
You may now purchase the book in major bookstores, or if you want autographed copies, please go to FQ Mom FB page (click SHOP), or FQMom.com (click BOOKS), or email us at FQMomm@gmail.com
- Want to know where your FQ stands? Take the FQ Test Challenge now! Click link. http://rebrand.ly/FQTest
Rose Fres Fausto is a speaker and author of bestselling books Raising Pinoy Boys and The Retelling of The Richest Man in Babylon (English and Filipino versions). Click this link to read samples – Books of FQ Mom. She is a Behavioral Economist, Certified Gallup Strengths Coach and the grand prize winner of the first Sinag Financial Literacy Digital Journalism Awards. Follow her on Facebook & YouTube as FQ Mom, and Twitter & Instagram as theFQMom. Her latest book is FQ: The nth Intelligence.
ATTRIBUTIONS: Photos from livescience.com, freepix.com, ciegei.fr, healthexchange.sg, zoom.me, istockphoto.com, arborinvestmentplanner.com, medium.com, mariafresa.net, Etsy, spacetimecubevis.com, pxhere.com modified and used to help deliver the message of the article.