QUESTION: It is my first time to invest in the stock market. Lately, the downward slide in prices is giving me a scare. Are there any rules that I should strictly follow in stock investing to assure me of profits? (question posed at “Ask a friend, ask Efren” free service available at www.personalfinance.ph and Facebook)
Answer: There are many rules to follow in stock investing, none of which will guarantee you a return. These rules will only go so far as to guarantee you the potential of making higher investment returns compared to savings rates in banks. Here are some that immediately come to mind.
1. Do not make a graven image out of money. Money has always been and will always be just one of the tools to achieve the more important things in life. The same goes for stock investing. Don’t get me wrong though. Money and stock investing are important tools. Just don’t let your life revolve around them as if they are the reasons for being. And when you make money, don’t forget to whom the glory belongs.
2. Forget about buying at the bottom and selling at the peak. Your chances of buying at the lowest point and selling at the highest level are as slim as winning the 6/55 lotto (about one in nearly 29 million). Why? Because you will only know that a particular price is either the lowest or the highest after the fact. Worse, you may not have even placed your order before then.
3. You beta watch out, you beta not cry. Generally speaking, stock prices tend to move together. It’s just that some move faster than others. A way to measure this relative movement is to measure a stock’s beta.
Usually, a stock’s beta is measured against a broad market indicator like the Philippine Stock Exchange Composite Index (PSEi). Operationally, if a stock’s beta is 1.5, and the PSEi made a 2% return, that stock should make a 3% (i.e. 1.5 x 2%) return. While this stock would normally produce a higher return than the PSEi, it could also produce a larger loss. If the PSEi were to move down by 2%, this stock would post a loss of 3%.
A higher beta would mean a stock with a more volatile and therefore riskier behavior vis-à-vis the PSEi. This is not to say that stocks with high betas should be totally avoided. You just need to match your risk tolerance with that of the stock you are buying.
In other words, buy with eyes wide open. You don’t need to perform the computations for deriving beta as you can simply ask for them from your stock broker.
4. Investment decisions have manufactured and best before dates. Do not cry over spilled milk, as they say. If you are truly diligent in studying your options before investing, you will always make the best decisions given the information available to you at the time.
However, the only thing that is constant in life is change itself. Your investment decisions will have a shelf life as many factors can change with the underlying companies you bought. So make it a habit to review your investments periodically. Once a quarter should be good enough.
5. Do not covet your neighbor’s allocation. Even if someone comes up to you to brag about the tons of money he made from a certain investment allocation, that is his allocation and not yours. His allocation was based on his own return objectives and risk preferences. Or perhaps, he simply got lucky.
And yes, Juana, there is such a thing as luck with investing. You will need to come up with your own allocation according to your own return objectives and risk preferences. How else will you be able to tell your own story?
6. Do not get too excited with breaking news. Stock investing is manic-depressive. Keep your cool when you come across exciting news. In the first place, if it were exciting news about a certain stock, it would already be a time to sell that stock and not to buy it. You are supposed to buy before the news breaks.
In fact, if you are investing in stocks with significant amounts of funds, expertise and time, you will get wind of developments before they hit the media and become news. More importantly, it is the long-term earnings and growth prospects of the underlying companies you bought that you should focus on.
There are many more stock investing commandments to write about. But the foregoing should give you enough to chew on for a while.
If you want to know more about investing, avail of our free tools at www.personalfinance.ph. You may also want to attend our financial planners’ training, details of which are at www.personalfinance.ph/fptraining.html.
Efren Ll. Cruz is a registered financial planner of RFP Philippines, personal finance coach, seasoned investment adviser and best-selling author. Questions about the article may be sent by SMS to 0917-5050709 or e-mailed to efren@personalfinance.ph. To learn more about personal financial planning, attend the 52nd RFP program on Feb. 20-April 16. For more details, inquire at info@rfp.ph or text at 0917-9689774.