Biggest risk facing Filipinos? Not investing
What is the biggest risk facing investors today?“ This was one of the interesting questions asked during COL Financial’s market outlook briefing last month.
As expected, I answered this question by highlighting one of the ongoing challenges facing equity markets. However, our chair Edward Lee answered this question by saying that the biggest risk facing investors is not being invested.
Although Mr. Lee’s answer came as a surprise to many including myself, what he said was true and very relevant these days.
Although staying in cash would allow us to avoid the risk of losing money, we would also lose out because the purchasing power of our cash diminishes over time. The pace would be even faster because of high inflation.
For example, when I began working many years ago, I only had to pay P50 a day for parking. Today, parking cost in Ortigas Center has increased to around P150 per day.
Not investing because you don’t have enough capital should not be an excuse. If you don’t have capital, look for ways to cut back on your expenses so you can set aside a certain portion of your salary every month as investments in stocks. This practice is called peso cost averaging and is an easy way to grow your capital over time.
Did you know that by just investing P5,000 a month in stocks, you can accumulate a total of P860,000 in 10 years, assuming an annual return of only 7 percent a year? If you maintain this habit for 20 years or twice as long, your funds would grow much more, by almost three times to P2.55 million, thanks to the power of compounding!
Admittedly, many don’t invest because investing is risky, especially in stocks which tend to be volatile. However, there are ways to manage risks, and this is what investors should do instead of avoiding investments altogether.
One of the simplest ways to manage risk is by investing only a small amount of money that you are sure you won’t need in the next few years.
Numerous studies have shown that investments in stocks generate the highest returns over the long term. However, stocks are volatile in the short-term making them riskier compared to other asset classes. Because of this, buy stocks with money that you are sure you won’t need in the short term to maximize the benefit of investing while minimizing the risk of losses.
Another way to manage risk is by diversifying.
Investing is risky because of numerous uncertainties. For example, there are many companies that were very big in the past but are now much smaller because their products became obsolete, and they failed to innovate. To minimize losses from picking the wrong stock, diversify your portfolio by buying several stocks that belong to different industries.
You can also diversify by buying mutual funds or unit investment trust funds (UITFs). Note that mutual funds and UITFs accumulate the money of numerous investors which are used to buy different asset classes including stocks.
Aside from being automatically diversified, these funds are professionally managed and available for as little as a few thousand pesos. This also makes them a good option for investors who are starting out and have little knowledge and small capital.
In fact, there is now an abundance of mutual funds and UITFs available in the market, giving you the option to invest in different markets and different asset classes around the world!
Finally, I believe that now is a good time to start investing. If you buy stocks today, the risk of losing money over time is very minimal in my opinion, provided that you have a long-term investment time horizon and a diversified portfolio.
This is because current valuations of stocks are very cheap. Most are trading significantly below their historical average P/E multiples and even below their book values. This is despite most companies delivering higher profits since last year as they recovered from the pandemic. Because of this, insiders of many companies are buying back their stocks.
With these tips, I hope that you will become more confident and start investing, so that you can overcome the risk that comes by not investing at all. INQ
