The beauty of investing lies in its imperfection
Question: The past two years of investing in the stock market has been one scary roller-coaster ride, to say the least. After the big drop in March of 2020, stocks appeared headed for a recovery with a sharp bounce. However, stock prices went back down, generally moved sideways for a while and then fell into a bottomless pit in 2022. Are things ever going to get better?
Answer: Sometimes, it is better to look at the forest and not just the trees. So, let us look at the historical movements of stocks over a longer period of time. In particular, let us review the historical performance of the Philippine Stock Exchange Index (PSEi) from 1958 to 1986, and from 1987 to 2021. The reason for the two periods is that the PSE changed the computation of the PSEi between 1986 and 1987. Let us also use the term PSEi to represent the composite index for both periods.
In terms of effective (compounded) annual return, the PSEi posted a performance of 1.9 percent per annum (p.a.) from 1958 to 1986 and 6.5 percent p.a. from 1987 to 2021. If we were to look at the annual returns of the PSEi, they ranged from a low of -51 percent to a high of 123 percent for the 1958 to 1986 period. For the 1987 to 2021 period, the annual returns of the PSEi ranged from a low of -48 percent to a high of 155 percent. The numbers do not seem that impressive, do they? In fact, they tend to agree with your assessment that investing in the stock market appears to be one scary roller-coaster ride.
Let us digress a bit. There is a Japanese term called wabi-sabi. They say there is no direct translation to English. According to Wikipedia, in traditional Japanese aesthetics, it is described as “a world view centered on the acceptance of transience and imperfection.” In a sense, positive and negative returns in the stock market are transient, always inter-changing. And that transience springs from the imperfection of systems and people running and investing in the stock market.
If we were to plot the annual returns of the stock market during the two periods, the result would be two charts with jagged line patterns. Neither positive nor negative returns ever come in a straight line. True investors and traders would call this volatility of returns “delicious.”
What is needed is not to shun but to embrace the volatility of returns of stocks. But, just like any roller-coaster ride, you need to be physically and emotionally fit to do so. The reward of investing in the stock market is not the risk. Positive long-term returns from active trading would be the pot of gold at the end of the rainbow.
Here is the proof. If you were to do a simple average of the annual returns of the PSEi, the period 1958 to 1986 would produce a return of 7.7 percent p.a. while the period 1987 to 2021 would produce a return of 12 percent p.a. And with the Philippine economy poised to be one of the leading economies to bust out of the recent pandemic, we can be sure that the returns could only improve.
Achieving those positive average annual returns is not that easy. We will need to trade stocks by constantly watching the markets, conducting research on companies, following the news almost 24/7, applying many investment precepts like modern portfolio theory and employing technical charting, among others. In other words, we will need to eat, breath and live trading.
Now, if we are not up to the task, then the simpler way is to hire fund managers. For retail investors who still do not have around P5 million in cash to invest, pooled funds are the best option. For the high net worth individuals who do have at least P5 million, investment management accounts are ideal.
Whether we trade actively directly or hire a fund manager, doing these will help us better see the beauty in the transience and imperfection of returns of stocks. INQ
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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 [email protected]. To learn more about personal financial planning, attend the 98th RFP Program this Oct. 16, 2022. To inquire, e-mail [email protected] or text 09176248110.
