We (my husband, sons and I) always get asked about the stock market, “When should we buy?” “What should we buy?” But when we give our usual answer, “Buy blue chip companies anytime you have your Emergency Fund in place and hold for the long term,” they don’t seem happy to hear it. It’s too corny. They want “hot tips!”
Yesterday I saw a friend I met back in my investment banking days and he told me that he’s losing a lot of money in the stock market. When I asked why he said, he just holds one stock. I was quite surprised because he’s definitely familiar with the stock market and knows about diversification. On Marvin’s end, he usually gets this remark, “Sabi mo sa TV tataas?”
It all boils down to how we treat stock investing. As I write this column, the PSEi is trading below 6,000 points (which later closed at 6,025.37) and there’s some panic and regret happening right now. “Pera na naging bato pa!” “What the ____ happened to this and that stock? “Should I sell now?”
If we’re lucky, we will all grow old and retire. For most of us, our steady source of income will be greatly diminished, if not gone. And so everyone must prepare for the inevitable.
In the olden days, the paradigm was study hard, get a good job and retire with your pension fund. Unfortunately, this model does not work anymore. For one, the average length of stay in a company has significantly gone down because of downsizing, the employee’s more flighty attitude and many other factors. Even if an employee stays for decades in a company, chances are his pension will not be enough to sustain him. Moreover, the average life span is getting longer. So what are we to do?
We should all take a more active role in preparing for our retirement. The ideal is to start setting aside no later than when you receive your first paycheck. If you’re a mother like me who always teaches her lessons learned to her children, you’d start your kids as soon as they’re born!
When you sit down and mindfully take control of your portfolio, try to figure out what your medium and long-term dreams are because there’s a price for each dream. Then decide what kind of lifestyle you want in your retirement years and prepare for it.
In building your retirement and dream funds, remember that your break-even return is inflation. Your investments should beat inflation rate. Unfortunately, we see a lot of people keep their money in savings/current accounts, time deposits, short-term money market placements, because they say they’re risk-averse. Here’s news for you. Doing this is the real risk. In fact, it’s beyond risky because it’s a certainty that your money will lose its purchasing power.
Where should I invest for the long term?
There are asset classes you may choose from – fixed income (bonds), equity (stocks), real estate, gold, currencies, commodities, derivatives, collectibles. For this article, I will only discuss the first three where I am invested. I do have a few pieces of gold jewelry and art work but they are more to satisfy aesthetics than anything else.
All three have their advantages and disadvantages and that is why we study our portfolio, so the mix satisfies our needs and dreams.
Fixed Income – back in the day among my favorites was the double your money investment. In 5 years my investments grew by 100%, which was actually 15% p.a., something unheard of these days. We still invest in bonds and we hold them to maturity so we don’t suffer from the declining bond prices. Our existing bond interest rates range from 5.45% p.a to 9.33% p.a. with terms of 5 to 7 years. These used to be tax-free but because The BIR Commissioner saw the loophole, they’re now taxable at 20%. Ouch! Probably, in our later years the periodical interest earnings from this asset class will provide for our regular expenses. For the meantime, all interest earnings are still reinvested in long-term assets in order to increase the nest egg.
Real estate – Our biggest real estate asset in our Balance Sheet is our home. We built a home early in our marriage where we raised our sons, enjoyed (and still do) lots of dinners, parties, playtime, relaxation, conversations, and quiet family time. We hear some financial gurus recommend delaying your house purchase but based on our experience, it was all worth the money, blood, sweat and tears put into building our home because it is the repository of priceless family moments starting when our kids were young. Just make sure you buy something that you can afford, including its maintenance.
Oftentimes I’ve been lured into investing in real estate, especially when I was working at the Makati and Ortigas areas in the 90s. I checked out some and I must have done a dozen of cashflow studies on condominium investment. Somehow, the conclusion of those studies never satisfied us that we never bought in those areas. Much later on, we bought one in QC, the turnover will be next year and hopefully, that investment will turn out well. The lot investments made were in areas that could be possible retirement homes if old age sickness will require us to live in less polluted areas, away from the metro. Lots are maintenance free, no homeowners’ dues to pay, but of course, no rental income is derived.
Now here’s the thing about real estate investment. Somehow it has an easy to understand wow! factor. When I heard that the Ayala Hillside property, which was being offered at P18,000/square meter back in 2003-2004, is now P80,000/square meter, I couldn’t help but feel ay saying! Ayala properties have a history of making waves in their price movements, but of course, they always sell at a premium. When Ayala Hillside was selling at P18,000/square meter, its neighboring villages were selling at just around P10,000/square meter. My good friend from Ayala would tell us, “Why don’t you try investing in Ayala properties?” and I would say with a smile, “They’re expensive, so I just buy the stock!” I heard Dasmarinas lots are now selling at P200,000/square meter!
Now after almost three decades of investing in our own little way, we now give our vote to equities as our asset class of choice for our long-term investments.
I started investing in stocks in a haphazard manner when I started working at Far East Bank. It was just based on Daw Theory (as in tataas daw) so in my carefree single days, I would plunk in maybe P2,000 or so hoping to make a quick profit out of it called chupita. Mind you that was also a significant amount of money for a credit analyst making just a few thousand pesos. Sometimes I did make a few bucks, but sometimes I lost and the stigma of losing was too great that I would stop altogether, until the next bull run came and everyone was excited all over again.
When we got married, and the kids started coming, that’s when we started setting aside money for blue chip companies. In fact, we bought some shares of easy to understand stocks in their names as gifts, which jumpstarted their stock investing. They still hold those shares up to now plus the ones they’ve bought with their own money that give them regular cash dividends, which they also reinvest.
Knowing what I know now, and you can check historical data to confirm this, I choose stocks over other asset classes because of the following reasons:
1. According to Jeremy Siegel, Wharton professor who wrote the book Stocks for the Long Run, stocks may be the most volatile asset class in the short run but are the most stable in the long run. His conclusion is based on his voluminous data on the returns of all asset classes and across several countries.
2. When I heard all those fantastic price surges in real estate properties, I decided to check historical data on real estate prices and the PSE index. Unfortunately, we do not have a real estate price index similar to that of Case-Shiller Index. I got hold of the historical data of land prices in the Makati CBD and Origas Center care of a friendly broker. Here’s what I found out. The peak was in 1997 when land prices in Makati were at P425,000/square meter, and P195,000/square meter in Ortigas. Prices fell all the way down in 2002 to P171,250 and P77,500, respectively. Now they’re up at P322,363 and P140,995, respectively. So they have not gone back to the 1997 price levels. The Makati CBD luxury condominium prices are what have gone back up – from P97,500/square meter, down to P64,000 and now at a new peak of P132,048, up 35%.
On the other hand, let’s check the PSE index. It started off at 3,421.91 in January 1997 all the way down to 1,103.36 in August 2002. September 2013 (in order to make it comparable with the real estate data) ended with 6,191.80, up 81%, almost double that of 1997 level.
The Ayala Hillside price surge I mentioned a while ago was an incredible 344% increase. But the Ayala Land, Inc. (ALI) stock price went up from around P4/share in 2003 to P26.90/share yesterday, up by over 500%. Moreover, when I checked my portfolio to see the price increase of my favorite “premiere” (as in high PE) stock Jollibee Foods Corporation (JFC), I was delighted. It was P18/share in 2003 and is now 180/share, up 10x in 10 years! Yum!
3. Anyone can start investing in the stock market. You don’t need the huge capital outlay required in other asset classes. You can start by just a few thousands. (Some investment plans allow you to invest as low as P1,000/month) You just buy as your money comes. This is ideal for the salaried employee.
4. Investing in the stock market gives you the opportunity to be business partners with the captains of our economy. This is a big reason for me. Let’s not be satisfied by just being their customers/clients. Let’s have a slice of their profits!
5. No annual real estate taxes, monthly homeowners’ dues, maintenance costs, tenant issues, huge capital gains taxes to pay, especially if it’s not your residence. To those investing in real estate, please take note of all these costs when you compute for your prospective return on investment. For rental income, I think there’s a VAT off the top and income tax at the bottom to contend with. On the other hand, commissions and stock transaction taxes are minimal.
6. Stocks are easy to buy and easy to sell. No need to spend days, months, sometimes years to match the buyer with the seller. You just post your order and the market will match it for you.
However, it is this ease to buy and sell that also brings about the things that make most stock investors, both newbies and seasoned, distracted from the long-term goal. After years of investing in the stock market, I still felt pain in the stomach whenever the market decided to dive, with or without a valid reason. I still felt the urge to pour in more cash whenever I saw the market rally like crazy. It was when I started recording my periodical investments years ago that I was able to be more rational and less distracted. Next week I will share some thoughts on how to make your stock market investing more successful.
(To be continued)