Bite-size investing
Question: How can I convince myself to invest in the stock market when all I hear are horror stories
of people losing a lot of money. Asked at “Ask a Friend, Ask Efren” free service at www.personalfinance.ph, SMS, Viber, Twitter, LinkedIn, WhatsApp, Instagram and Facebook
Answer: There is this story of a handyman who wanted to fix the leaking air conditioning unit in their home. The air conditioner’s leaking had disrupted his sleep for a few days as he needed to get up and empty the ladle that he placed underneath the air conditioner to catch the dripping water.
Our handyman’s wife was against fixing the air conditioner immediately as he had promised to go with her to the bank. But since he noticed that his wife still needed to fix all of the documents to bring to the bank so that the transaction there would not take too long, our handyman decided to clean the air conditioner, promising his wife that he would be done by the time she was finished with the bank documents. His wife grudgingly agreed.
And because he had done his research on how to fix a leaking air conditioner, the job was done in 30 minutes, just as his wife was finishing up on the bank documents. So, from having the No. 11 seemingly etched in between her eyebrows, as she too was somewhat annoyed with the air conditioner’s leaking, the wife went to the bank with her handyman of a husband with a beaming smile.
We all need instant wins, even if they be small. Whenever we do get these wins, our brain is flooded with dopamine, the pleasure chemical. Dopamine rewards us for doing a good job and encourages us to do the same thing again. You can do a good job with investing, even with a volatile outlet like the stock market.
And the best way to achieve these instant wins is to manage a portfolio that only slowly dips into equities, in bite sizes so to speak. Just like our handyman, researching companies whose stocks are listed on the stock exchange is also important as even a small exposure to stocks can turn negative. On the other hand, a gain, no matter how small, is still a win.
That is why a relatively safe bet would be to start with a blue chip with a history of paying cash dividends. It would be best to assign a review period of no shorter than six months (i.e. a year would be ideal) to give time for the stock to gain earning momentum.
Hopefully, the fact that the portfolio will be skewed toward fixed income securities plus the potential cash dividends will somehow cushion the negative impact of the possible poor stock price performance.
And be wary of the tendency of newbies toward the disposition effect. With disposition effect, newbies tend to hold on to losers too long, hoping that they will still recover even if the losses are already large. On the other hand, newbies tend to sell winners too soon even if fundamentals justify the ascent in their prices. All these stem from loss aversion, a trait that has been embedded in our brain from the time of the caveman.
If all this is confusing, let a financial planner guide you in creating that unique portfolio for you. Just choose one who prioritizes giving you advice.
Stay safe and healthy.
Efren Ll. Cruz is a registered financial planner of RFP Philippines, seasoned investment adviser, bestselling author of personal finance books in the Philippines. Join our Yaman Coach Free Webinar series. For details, email [email protected].
To learn more about personal financial planning, attend the 86th RFP Program this November 2020. To inquire, email [email protected] or text at 0917-6248110.
