ASK Dr. NOET
How to deal with topsy-turvy markets
By Dr. Johnny Noet Ravalo
INQUIRER.net
First Posted 14:47:00 02/07/2008
I am an OFW from Leyte with three kids, all in college. I have a dollar savings account and it pains me everytime the peso strengthens against the dollar. Do you recommend that I should withdraw my dollars from the bank before it goes down to P35 per dollar? Is the weakening of the dollar temporary? --- Mr. Jacinto
Over a period of time, I have been collecting your tips and to learn a little about investing. To take the first step forward is bit difficult though specially the timing. Kindly advise if this year 2008 will be a good time to invest in mutual funds. With the current economic situation in the Philippines being affected by the economy in the US, is it advisable to invest this year and where? --- Efren
These two questions are typical of the queries that we have been getting and the concerns are perfectly understandable.
The peso-dollar rate will always be an emotional issue for the Philippines since the reality is that the purchasing power of our overseas workers is at stake. There was $14 billion sent to the Philippines by overseas workers last year. Using that number as a basis, even a one-centavo change in the exchange rate will have a P140-million impact on purchasing power.
Since I have never physically seen P140,000,000.00, all those zeroes to the left of the decimal point are impressive and a big deal to me. But measured against gross domestic product (GDP), the amount represents only 0.0021048 percent of the early estimate for 2007 GDP.
I do not intend to argue whether the impact is big or small. The simple fact is that there will be winners and losers with any change and that those on the losing end are not likely to feel good about gains elsewhere.
I am also not about to say that we should just sit back and do nothing. That would be foolhardy.
But we do have to confront three basic realities that are driving the issue in the first place: that market conditions change; that they do change faster than readers come to know about from the morning papers and that much of the change is beyond the control of any investor.
Whether the peso will further strengthen to P35 per dollar or go back to, say, P45, is the challenge of making a forecast and this specifically involves making a call on both the direction and the timing of the change. I am sure Mr. Jacinto would like to get some inputs on this but for now that is a separate --- but certainly important --- issue.
To me, the first issue when dealing with financial markets is to accept that change is imminent. Far too often, we have a simplified view of how this market behaves and when change happens, we are very surprised and then ask whom shall we blame. The reality is that change is our basic deal with this market. That is the deal that we sign onto when we worry about foreign currencies or investment instruments. That is the deal that is, unfortunately, inherent in Mr. Jacinto's situation, having to earn in one currency to provide for his family's needs in another currency.
It is also the very same deal that Efren must appreciate when he worries “when” to start making investments. Daily fluctuations will mean that, on paper, we are making gains and losses as market prices change. It can look scary in a volatile market and can be tedious to track but it is more practical for the investor to have a daily gauge of the price.
Personally, I prefer that than the false comfort of believing the market values my investments at par value and then only to be rudely shocked that, in fact, the instruments are being priced at a huge discount and thus a loss to me if I need to sell them today.
What this means for Efren is that “timing” your entry into the market cannot be judged solely by the presence of changing market conditions, and thus by extension, changing market prices.
What is really underpining Efren's decision to enter the market is the challenge of finding value among the investment options and then choosing the “better values” among the good buys consistent with the risks that he is willing to take as an investor. The bottomline is not about changing conditions but that of valuation. But let's not sugar-coat this too: valuation is an involved technical process which can be difficult even for those who took college courses in finance. This is why there are accredited professionals who do this so we don't have to do it ourselves all the time for each market instrument (although it wouldn't hurt us to be familiar with the basic processes).
The point of all these is that the financial market is in a continuously evolving state and that change itself is not an absolutely bad thing all the time. No one is to blame for change and even regulators recognize that their challenge is not to prevent change but to mold its eventuality.
Dealing with change though is the “execution” part and that is step two. Step one starts with accepting that change is imminent and forming a clear understanding of one's financial situation in relation to how markets change. This understanding is a “personal process” of identifying what you have, what you need, what you want and making an objective determination if these three are consistent. I think only then can we even consider step two.
Efren has a little advantage here because he can --- in fact by SEC's recent regulation, must --- go through a broker who can provide him information about his investment alternatives given his needs and preferences. Without suggesting that it is the definitive way to go, perhaps Mr. Jacinto can explore the possibility of allocating some portion of his dollar deposits into fixed income instruments in a way that is suited for his family's cashflow needs. In this way, he is not totally limited just to the conversion of his dollar income into pesos, but can augment this with additional periodic interest income no matter which way the peso-dollar rate goes.
(Have a question for Dr. Noet? Email personal_finance@inquirer.net)
(Noet Ravalo is a macro-financial economist by practice and profession. He was chief economist of the Bankers Association of the Philippines until 2002 and has since been doing consulting work. Since 1994, he has been asked to provide technical inputs to both the Senate and the House of Representatives on various economic and financial legislation, some of which will have big impact on Filipinos' personal finances.)
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