Investing in Stocks – A Long Term Attraction

This short note centers on (in general terms) stock market investing.

You have your first bonus and would like to invest in the stock market cause you have heard it provides very high returns of investment. With inflation abruptly shooting up to 6.4% in August alone, going into short term time deposits and T-Bills hovering in the 2.5 to 3.5% per year range won’t do much to protect the value of your money in the long haul.

But if you are young, building your career, have yet to start a family, and accumulating wealth over the long term, consider investing in the Philippine Stock Market. But which specific stocks should you get into? No worries – novice investors can consider the issuers comprising the Philippine Stock Exchange Composite Index (PSEi), which is a fixed basket of thirty (30) common stocks of listed companies, carefully selected to represent the general movement of the stock market. In other words, it is the benchmark measuring the performance of the Philippine stock market.

The Right Time to Invest

With at least P5,000 to invest there several Unit Investment Trust Funds (UITF’s – managed by Trust departments of banks) and Mutual Funds (managed by a fund manager) that track the PSEI Index. Aside from being affordable, they are managed by a portfolio/fund manager and are assured of risk diversification across different industries.

When is the right time to invest? There is no right or wrong time when you are looking long term. In fact, “time is on your side” as more time allows you to ride thru the “bumps” or negative returns that can occur when investing in the stock market. Let’s look at a few facts and figures:

  • From 1995 to 2000, investing in the repertoire of stocks comprising the PSEI Index (assumes investing in a PSEI tracker fund excluding dividends) would have cumulatively lost almost 42% of your portfolio value (an average of negative 7% a year).
  • However, had you stayed invested until 2004, your cumulative loss would have been reduced to 8.4% or less than 1% loss/year.
  • Investors who started investing in 2001 and stayed till 2010 would have obtained annual positive returns averaging 16.4% in spite of three (3) years of losses (2001,2002 & 2008) totaling 82%!
  • The US financial crisis in 2008 helped contribute to the negative 48+% in the Phisix. But since then, markets have generally closed in positive territory such that the average yearly return covering 2008 till 2017 was more than 13%.

In short, set aside a portion of your excess cash for long term savings and invest it every payday. You will hear both good and bad news as you go about your daily routine but rest assured of the long term rewards with your simple action plan.

First time stock market investors should invest in Index Funds to “get their feet” wet before tackling individual stocks.