Question: The Philippine Stock Exchange index (PSEi) started 2022 at 7,123. It dropped by 15 percent to 6,065 on June 23. The index then climbed back up by 13 percent to 6,864 on Aug. 19, only to drop back down by 16 percent to a new low for 2022 of 5,741 by the end of September.
As of the end of the third quarter of 2022, the PSEi was down 19 percent on a year-to-date basis. If that is not a rollercoaster ride, then I don’t know what is.
I heard that the technical description for a bear market is when the market falls by 20 percent from its recent highs … How can an investor manage in such a volatile market? (Editor’s note: The PSEi entered the bear market last Sept. 27 when it hit 6,020.07)
Answer: Jose Mari Chan perhaps described the stock market best in his song, “Can We just Stop and Talk Awhile.” To paraphrase the singer, when the stock market is going crazy, the best thing to do would be to “get away from the gray and frenzied hurly-burly of” investing life.
Investors and traders can be manic-depressive. For example, it was widely expected early in 2022 that the US Federal Reserve would successively raise interest rates to fight runaway inflation, but that such action would lead to a recession in 2023. When the Fed began raising interest rates, the market initially cheered as it was finally springing into action after being overly optimistic about the minimal effects and short-term impact of supply bottlenecks on inflation in 2021. This development sent stock prices higher around the globe.
But soon after, fears of the projected ugly recession in 2023 started to become more prominent, even though it was the earlier recognized bitter pill that needed to be swallowed to rein in inflation. Analyses became more granular and started to paint a “hard landing” for the US economy. This development sent stock prices around the globe into a tailspin. On hindsight, the widely expected 75-basis point hike in US interest rates last September became more of a confirmation of the hard landing than a comfort that the Fed was going toe to toe with runaway inflation.
In such situations, the best thing to do is to take a step back. Remind yourself why you are investing in the first place. If your answer is to make money, then think again. You will need to spend that money eventually on something.
Purpose-driven investing has always been the way to go. And the more noble the goal (e.g. children’s education, house, retirement), the more you will be prudent with investing your money. Part of being prudent with money is to accept that when it comes to stock market investing, volatility is par for the course.
But the good news is that extreme volatility happens only for a short period of time. Many times, prices will be bobbing up and down within an upward sloping channel. So, the longer you will be invested in the stock market, the more this volatility will be smoothened out. After all, stocks are really long-term investments.
At the same time, periodic investing is more often than not superior to investing one-time as the volatility in stock prices can lead to bargains in times when investors are too jittery.
A prudent investor also does his own research and formulates his investing strategy given the many expected scenarios that may take place. He will not blame himself for unexpected circumstances like the pandemic or the crazy behavior of the market. In fact, his strategy should allow him to take advantage of such panic-filled moments. The prudent investor will adhere to his strategy but will not be closed to modifications needed to address intervening situations.
More importantly, the prudent investor will stay calm and may even just stop and talk awhile.
(Send questions via Asked at “Ask a Friend, Ask Efren” free service at www.personalfinance.ph, SMS, Viber, Twitter, LinkedIn, WhatsApp, Instagram, and Facebook. Efren Ll. Cruz is a registered financial planner and director of RFP® Philippines, seasoned investment adviser, bestselling author of personal finance books in the Philippines and a YAMAN Coach™. To consult with a YAMAN Coach™, email yaman@personalfinance.ph. To learn more about personal financial planning, attend the 98th RFP Program this October. To inquire, e-mail info@rfp.ph or text at 09176248110)