Every time you watch a business channel or open up the business section of a major newspaper, you will hear some news about the stock market. In today’s social media environment, you will also notice the proliferation of discussions 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 five 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 UITFs). The stock market is a very good hedge against inflation, which is 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-term 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 bluechip 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.”
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.
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! 500K out of over a 90M 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 they 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 among us Pinoys. 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 P5 trillion while Special Deposit Accounts (SDA) at approximately P1.5 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 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 two cents.
Randell Tiongson is an advocate of Life & Personal Finance. He is a Director of the Registered Financial Planner Institute (Phils.), a columnist of the Philippine Daily Inquirer and has over 20 years experience in the financial services industry. For speaking engagements, financial planning, training and consultancy, write to firstname.lastname@example.org. To read his personal finance blogs, visit www.randelltiongson.com.