Investment

About Stocks: Message from the Chairman Edward K. Lee – COL Founder & Chairman

Sharing the message from Edward K. Lee – COL Founder & Chairman

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.

When US rates are trending up, we enter a risk-off environment. Investors reduce their risk by moving their investable funds into safer assets, moving from stocks to bonds and from emerging markets to developed markets. In a risk-on environment, the opposite happens.

Once rates stabilize or start trending down, you can use that cash that you set aside to get back into the market using peso-cost averaging over a period of six to eight months.This 2019, we still expect to see some volatility as markets anticipate global economic growth to slow down this year. However, I believe that the Philippine growth story is still intact.For passive investors, this means continuing to trust in the long-term game. Active investors, on the other hand, should learn when to be aggressive and when to step back. Whichever kind of investor you are, as long you stay calm and remember the rules of the game, you’ll be able to invest wisely and attain financial independence through the stock market.
During risk-off environments, active investors should manage their risk on the downside by reducing their exposure to the stock market by 20% to 30%. This way, your portfolio can be protected from the full impact of any market declines.

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