QUESTION: The last few days have been very stressful to me because the market has been falling so fast. All the stocks in my portfolio are all in the red. How low can the market go? Should I cut my losses now? Can I still make money in a bear market? Please advise —Nely Balanlayos by e-mail
Answer:Last March, I wrote in this column that a major correction might be forthcoming and could cause the market to fall by as much as 600 points over several months toward the 7,250 level. While this target was hit last weekend, the correction turns out to be a precursor to a bear market, as the market crashed with a loss of 500 points to 6,800 the other day.
The fall was a correction waiting to happen as the market had gone too far ahead of its fundamentals at 21x P/E. In that article I said market capitalization (at that time) was already 101 percent of Gross Domestic Product (GDP), making it highly overvalued. For the market to align its fundamentals with the growth of the economy, market capitalization must be 75 to 90 percent of GDP.
The market has so far fallen to 80 percent of GDP but with the bearish sentiment in the global markets, the downtrend may be exaggerated that could further push total market cap toward the lower to 75 percent of GDP. This means the market may lose 10 percent more in the process, dragging the index to as low as 6,400.
This is just a possible scenario but not impossible. There will be rallies down the road as the market struggles to stay afloat. It should be able to find some support midway depending on how uncertainties are resolved. Uncertainties—such as how the market will be affected by the rise of interest rates in the US—will most likely dictate the bearish mood of investors in the coming days.
When the market is pessimistic, investors tend to bargain for lower valuation, which can cause share prices to trade lower. If you are invested in the market and most of your holdings are down, keep calm. Study the possible scenarios and come up with strategy. If you expect your stock to fall deeper, should you cut loss now? How much loss can you tolerate? Should you wait for a rally first and sell on strength? How do you plan to recover your losses?
People would panic only when they do not know what to do. Very often, they make selling decision out of emotional fear. But when you know your strategy, you can execute objectively and keep your emotions under control. You may have to incur losses but if this will keep you liquid and enable you to buy stocks at lower prices later, your long-term gains may more than compensate your losses.
If you are looking to invest with your extra cash, now is your best opportunity to buy. It is not easy to buy when everybody is selling. The fear of losing will overwhelm you, but if you have a buying plan, you should be able to manage your risks and overcome your fear.
In a bear market, do not invest all your savings at once even when share prices are historically low. A defensive way to do it is to use the peso averaging cost method.
Under this method, you will commit yourself to invest a fixed amount of money regularly. When the market falls, your fixed investment will be able to buy you more shares, allowing you to average down your cost. This method works best in bear market.
The most reliable stocks to buy are those that are part of the PSE Index. These are mostly stocks considered blue chips with solid track record and strong institutional following. When the market recovers, these are the first stocks that will gain the most.
Many index stocks are currently trading at their 52-week lows that offer high reward to risk ratio. Among them are PLDT, Megaworld, BPI and ICTSI. Other stocks to watch are Ayala Land, trading 7.8 percent above its 52-week low, Banco De Oro (7.9 percent), Jollibee (2.2 percent), LT Group (5.8 percent), Metrobank (7.7 percent), Meralco (7.2 percent) and Petron (5 percent).
When you buy, make sure you are buying for the long-term. Do not expect your stocks to recover immediately. It may take some time before the market reverses its trend. Use this as an opportunity to build your portfolio for the future.
Investing in a bearish environment is not fun. Anything negative can really be discouraging. But this is not the end of the world yet. Remember, the stock market is always forward looking. If you are serious about investing, now is the best time to buy for the future.
(Henry Ong is a registered financial planner of RFP Philippines. To learn more about personal financial planning, attend our FREE personal finance talk on Sept. 2 at PSE Center Ortigas. To register, e-mail at info@rfp.ph or text <name><email><RFP> at 0917-3464126)