Did the PSEi go nowhere in 2021?
Question: When I review the PSEi’s performance in 2021, I get discouraged with investing in stocks. Just look, the index ended 2020 at 7,139.71. And on Dec. 27, 2021, the index closed at 7,254.80 and will probably close the year not too far from that level. That performance is equivalent to only a 1.6% gross return, which is not that much better than regular time deposit. Am I better off putting my money in fixed income instruments that could perhaps pay higher like bonds? Asked at “Ask a Friend, Ask Efren” free service at www.personalfinance.ph, SMS, Viber, Twitter, LinkedIn, WhatsApp, Instagram, and Facebook
Answer: I cannot deny that the PSEi had a lackluster performance in 2021. But that is only if you are looking at a situation wherein you invested at the start of the year and harvested at the end or in this case Dec. 27, 2021. The problem with this strategy is that you made a big bet on an investment that has a tendency to go through troughs and peaks like a roller coaster ride and especially during the time of COVID-19 when the vaccines against the virus were just about to roll out and treatments against the disease were still far off.
In investing, risk needs to be managed. Remember that risk is not the reward. It is just a necessary cost of putting money in risky assets. And while there are many ways to manage risk, among the simplest ones is to spread out the risk through time. In other words, cost averaging would have been the better strategy.
As it turned out, the Philippine stock market basically went through two major troughs in 2021, both of which were caused by lockdowns due to surges in COVID-19 cases. The first one was fueled by earlier variants and the latter by the Delta variant. A minor trough was fueled by the Omicron variant late in the year.
But with each trough came an amazing determination of investors to bounce back. Providing the foundation for recovery is the steady arrival of vaccines in the country coupled with the implementation of testing, tracing, masking and social distancing. And true enough, from a peak of around 26,000 in daily cases, the country registered just under 200 just before Christmas day, leading Octa research to tag the country as very low risk. And while the PSEi has experienced drops in its level for 2021, it never went back to the lows of 2020.
Now, if you had invested P5,000 every month-end from January to November and on Dec.27, 2021, your return, if you had also sold on Dec. 27, 2021 would have been 15.9 percent on an absolute basis. You did not even have to be a stock picker. Even if you merely followed the allocation of the PSEi, you would have earned the said return.
What is more interesting is that you could have made more if you reinvested the dividends you would have earned from the allocation. Using the PSEi Total Return Index (TRI) as the basis for measuring your performance, the reinvestment of dividends would have provided you an absolute return of 17.5 percent.
Paraphrasing the old saying, do not invest all of your eggs on the same date. Manage the risk by doing peso cost averaging. You will not only potentially earn more when the market rebounds but also sleep more soundly at night. INQ
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