A client approached me at an event recently and told me, “I've been investing in the stock market for five years, but I haven't made money.” I believe this might echo the sentiment of some of our fellow investors out there. The PSEi has been going sideways, and 2018 was extra challenging. It’s during these times, when the markets crash 25%, that people start doubting the stock market. “Is it really worth investing in?”
The answer is yes, most especially for long-term investors. We need to understand that volatility in market cycles is normal. Looking instead at the positive side, always remember that market crashes are needed to have higher returns. These drops are chances to buy cheaper if you’re doing peso-cost averaging. For active investors, these can become a very rewarding opportunity if you know how to capitalize on it.
How do we do that? The first thing to know is that crashes are not created equal. There’s a difference between a policy-driven and a credit-driven crash. Past crashes like the ’97 Asian Financial Crisis and the ’08 US Housing Bubble had underlying systemic risks that were credit-related. Governments had to step in, and markets took years to recover.
On the other hand, what we’re going through for the past few years has been policy-driven, specifically by the US Fed. There’s no problem with the overall economy, and stock market movements are heavily influenced by investors managing their risk by shifting from one asset or market to another.
Since the Philippines is very sensitive to foreign fund flows, there’s a negative correlation between the performance of the PSEi and the US 10-year interest rates, with the impact of interest rates becoming more pronounced in the last few years.
