One of the most frequent questions I get asked is this: “I would like to invest in the stock market but I don’t know how. I also have a full-time job making it impossible to monitor the market. What should I do?”
The good news is that lack of experience and having a full-time job should no longer be obstacles for anyone to invest in the stock market given various products and services that make it easy and affordable to invest.
A product that makes it easier for inexperienced and busy people to invest in the stock market is the equity index fund. Despite its very intimidating name, it is simply a pooled fund that aims to match the performance of a stock or equity index. In the Philippines, our main stock index is the Philippine Stock Exchange index or the PSEi. The PSEi, in turn, is comprised of a lot of well-known companies that we Filipinos patronize every day such as SM, Ayala Land, Globe, PLDT, BDO, BPI, Metrobank, Jollibee and Robinsons, among others. By buying an equity index fund, you are actually buying shares of all these companies.
For the inexperienced and busy investors, there are numerous benefits of buying an equity index fund instead of individual stocks directly. Since it is comprised of numerous companies that are part of the PSEi, investors who buy an equity index fund are automatically diversified, which is very important as it protects investors from unforeseen circumstances that could hurt the profitability of even the best-managed companies. For example, Nokia was one of the most sought-after brands when cellular phones first became popular more than 20 years ago. Unfortunately, Nokia failed to maintain its lead and investors who bought shares of Nokia to capitalize on the brand’s popularity are significantly worse off today.
Investors also achieve diversification even with a small amount of capital since equity index funds accumulate the capital of numerous investors to form a substantial amount to buy stocks that are part of the index. In contrast, investors with a small capital will have a difficult time diversifying because of minimum board lots required to buy individual stocks. Based on our estimates, an investor would need at least P94,000 to buy one board lot of all 30 stocks that are part of the PSEi and at least P665,000 to fully replicate the performance of the PSEi, including the correct weights of all index stocks.
Investors who buy equity index funds also don’t need to do any stock picking because professional fund managers do the work. This makes equity index funds perfect for busy people who don’t have time to monitor the market consistently.
Compared to other types of equity funds, equity index funds also charge lower management fees since the fund manager doesn’t need to do much to replicate the performance of the index. These lower fees are also beneficial in enhancing the return of equity index funds.
Unlike before, equity index funds are also now more accessible. In an effort to capitalize on the growing popularity of investing among retail investors, many asset management companies have made their funds available online through online stockbrokers such as my company, COL Financial.
Not having a lot of capital is also no longer an obstacle to investing as asset management companies have significantly reduced the minimum investment required to buy a mutual fund from P5,000 to P1,000. The amount needed to make additional investments has also been reduced to only P500 from P1,000. This means that even if you earn only P15,000 a month, you can already invest in the stock market since P1,000 is less than 10 percent of your salary. On top of that, you can easily grow your portfolio by making additional investments of P500 a month. Saving P500 is much easier compared to saving P1,000 a month as this requires only small sacrifices such as one less cup of Starbucks coffee a week or one less movie date a month.
Busy people who don’t know what stocks to buy can employ the peso cost averaging strategy instead of active trading. This involves constantly buying equity index funds on a regular basis. This works especially well for someone who plans to buy stocks for long-term goals such as retirement. Based on our computations, an investor who set aside P5,000 a month during the past 10 years would almost be a millionaire today as he would have around P936,000 in his portfolio. The longer you stick to the strategy, the better, as an investor who set aside P5,000 a month during the past 20 years would now have P3.76 million, which is more than double than what he would have if he had only invested the past 10 years.
Staying disciplined with the peso cost averaging strategy is also no longer a problem. Once you have committed to setting aside a certain value of your monthly salary to stock investments, technological innovation allows you to automatically transfer that amount from your payroll account to your stockbrokerage account. You can then program your stockbrokerage account to automatically invest the amount in the equity index fund of your choice. Automatically transferring funds out of your payroll account minimizes the risk that you will end up buying something frivolous instead of buying an equity index fund for your investment portfolio.
Given the increasing availability and affordability of equity index funds and technological innovations that help you stay disciplined in your investments, lack of experience and having a full-time job should no longer be obstacles to investing in the stock market today. Armed with this knowledge, I hope that you will start your investment journey right away.