With all the good things we hear about the Stock Market, are we to expect that more Pinoys are now investing there? Not really. Data from the Philippine Stock Exchange (PSE) reveals this –

In 2011, there were 505,054 accounts registered among all active trading participants, up by 1.3% from the previous year’s total of 498,838 accounts. Of the total 505,054 accounts, 478,362 or 94.7% were considered retail while 26,692 or 5.3% were classified as institutional accounts.

Here’s more –

Of the total accounts in 2011, 157,535 or 31.2% were considered active. Active accounts are defined as accounts that have traded at least once during the year. The number of active accounts in 2011 rose by 31.3% from the previous year’s total of 120,016 accounts.

What the numbers are saying is this – only a handful of Pinoys are invested in the PSE! 500 K out of over a 90 M population makes that a very small percentage – roughly 0.5% of the population. With all the gains of the market in the recent years, Pinoys could have taken advantage of improving their financial situation… but unfortunately, only a handful did. While I don’t expect a staggering percentage of Pinoys investing in the market because of its risk and complexity, 0.5% is just way too miniscule. By contrast, some countries have 30 to 50% (or more) of their population investing in their Stock Market directly or indirectly through funds.

There are reasons why people stay away from the Stock Market but the top two reasons I would like to believe is ignorance and fear.

Admittedly, the Stock Market requires some studying before anyone should enter it. I always remind people not to invest in anything you don’t understand; but the Stock Market isn’t also rocket science and I have faith that the average Pinoy would be able to understand equity investing – or at least 1/3 of our population can. Reading a starter book, researching over the internet or better yet attending a seminar will do wonders to enlighten Pinoys on what the Stock Market is all about. Basic understanding of how the Stock Market operates is a worthwhile endeavor for us Pinoys because we can really benefit by investing in it – at the same time help the country grow its capital market (a discussion for another blog). A healthy and robust stock market that is sizeable in volume is very good for the economy. Currently, the PSE is healthy and robust albeit with very little volume.

Fear is another issue amongst us Pinoy. It has been a noted fact the Filipinos are risk-averse in nature, meaning we tend to avoid risks especially in investing and business. Proof of which is our huge money in Savings account and Special Deposit Accounts. BSP numbers pegs bank accounts (Savings, Checking & Time Deposits) at about P 5 Trillion while Special Deposit Accounts (SDA) at approximately P 1.5 Trillion. A big chunk of the money of the Pinoys is not really being invested and definitely not earning properly. While Bank accounts and the SDA are really safe investments, their yields are almost certain to be below inflation rates which means that most of our money are really eroding in value.

My recommendation is this – let us all learn about investing because it is one of those things that will bring us financial freedom and it can empowers us. Let us also not be crippled by fear because if we risk nothing, we gain nothing and I don’t mean speculating or gambling our hard earned money away – we can learn to diversify and practice prudent investment planning. If individual investing in the Stock Market may be too much for us to bear, then I suggest we look at pooled equity funds like the UITFs or Mutual Funds as well. Regardless of investing directly or indirectly, I believe it’s time for Pinoys to learn and invest in the Philippine Stock Market.

My 2 cents.

Every time you watch a business channel or open up the business section of major newspaper, you will hear some news about the Stock Market. In today’s social media environment, you will also notice the proliferation of discussion with regard to the Stock Market. You will often read and hear reports on the Stock Market index going up or going down, rising or crashing. The Stock Market makes up an interesting news report or casual conversation among many it seems.

Why is the Stock Market creating such a buzz? Well, though a lot of people have lost money investing in the stock market, a lot of people also made money there too! There are many reasons why we should invest in the stock market even if it’s riskier than most other investment instruments and the biggest reason would be returns. Over a period, investing in the stock market has been proven to be a good hedge against inflation and figures can prove that the returns of investing in the Stock Market is worth the risk. Let’s look at some facts: If you invested in the Stock Market whether buying individual shares or through a pooled fund like a UITF or a Mutual Fund, you would have realized a return of about 30% per year. Had you invested 5 years ago, the yield will be lower at about 10% per year which is significant because all Stock Markets crashed in 2008 due to the Sub-Prime crisis. Even with one of the worst market crashes in history (2008) occurring, investors in the market would have still yielded good returns and those returns will outperform most other investment instruments like Bonds. As to whether the Stock Market will continue to rise in the next few years, only time will tell but the general contention of many is that the Philippine market will continue to surprise the world with its performance.

One more thing about the Stock Market is that you don’t have to be a wealthy person to invest in the market. A few thousands here and there and you can buy your shares – or with as low as P5,000 to P10,000 you can  buy into a Stock Market Fund, also known as Equity Fund through Mutual Fund Companies or the Bank (for UITF). The Stock Market is a very good hedge against inflation and it’s something we should always be concerned about. The growth of our investments should always outperform inflation rates over a long time, lest the value of our money will erode in purchasing power. Money’s value is really based on what it can buy, not on its absolute amount. Stock Market investing is very good for long termed objectives like retirement, education and others because of its high returns over a long period is great, well at least in theory.

I’ve asked two of my friends who are experts in Stock Market investing as to why we should consider investing in equities. Incidentally, both of them are named Marvin.

According to Marvin Fausto, Chief Investment Officer of BDO we should be investing in the Stock Market because “the Philippines is entering a new phase in the economy where most of the variables are pointing to a growth momentum. Interest rates are low, inflation is stable, our currency is strong and business confidence is high. It is by investing in blue-chip companies in the Stock Market where Pinoys can ride this momentum of growth and benefit from its long term investment returns.”

Marvin Germo, a Stock Market investor and educator (popularly known as Mr. Stock Smarts) thinks Pinoys should really consider the Stock market because “it is a tool available for everyone to hit their financial goals and at the same time take part in the growth of the country.”

… Catch part 2

Question: How do you invest wisely in an unstable market? What are the criteria that one should look for?—Rigel Kent Tugade (@rigeltugade) via Twitter

Answer: What you asked me is one loaded question. There are many ways to answer that question so let me take a shot at it. There really is no such thing as a stable market, in my opinion. Markets go through cycles or seasons. There are many things that affect market movements but largely, they are responding to the law of demand and supply. What investors should be wary about are wild fluctuations in the market environment and, unfortunately, that is what we are experiencing now.

Market movements, to a great degree, are about perceptions and fundamentals. People have a tendency to be severely optimistic or extremely pessimistic with their reactions which the markets reflect. Fundamentals of companies, business, economy and even politics affect markets in general. If business environment is good, companies are profitable, the economy is growing and there is political stability, expect the markets to respond positively and vice versa.

Severe movements in the market have both positive and negative impact. On a positive note, opportunities can be found with volatility for those who are risk takers. The downside of course is that capital loss can easily be experienced just as fast as profit can be made. The relationship of risk and return always comes into play whenever you invest. Yields will always be a function of the risk you are willing to take and as the cliché goes: High risk, high returns and low risk, low returns.

When investing, it is always prudent to know your investment objective, time frame and risk tolerance first and foremost. Investment instruments should be able to match the three I mentioned before considering parting with your hard-earned money. If your objective is long-term in nature, like retirement or college funding for your young children, then you may consider long-term instruments even if they can be volatile, like stocks, mutual funds and UITFs [Unit Investment Trust Funds], or even real estate. Although they are volatile, they are expected to grow over time—well, at least in theory. You may also want to practice cost averaging when you are investing in those instruments. You can invest regular amounts periodically, thereby averaging your investment cost. When market is low, your investment will allow you to buy more shares and vice versa—you will realize that you have gained from your investment over a long period of time. Cost averaging only works if you have a long-term perspective, say more than five years. I usually recommend monthly or quarterly investments over a long period of time because it is practical and it allows you to fully realize the benefits of cost averaging.

However, the best advice I can give you is to practice “diversification.” No one can predict what will happen in the future. While technical and fundamental analysis helps one discern, there really is no way we can be certain as to what will happen. It is best to diversify your portfolio among low- and high-risk instruments, as well as high liquid and low liquid investments. Having a severely low-risk portfolio means your money is not growing efficiently and is most likely growing at a rate slower than inflation. Over time, the value of your money diminishes as it loses purchasing power.

A very high-risk portfolio, however, can cause you many sleepless nights as fluctuations in the market can severely deplete your capital. As a financial planner, my recommendation has always been to strike a healthy balance and avoid extremes.

The good book even recommended diversification and here’s the proof: “But divide your investments among many places, for you do not know what risks might lie ahead.” (Ecclesiastes 11:2, NLT)

I hope this answers your question. By the way, the best thing you can do is also to invest in financial education.

* Appeared at the Philippine Daily Inquirer