i. You can profit from volatility if you can make a strategic position.
ii. Outpace inflation by investing in a diversified portfolio of stocks.
iii. Having a sufficient emergency fund will help secure your short-term needs and your investments, too.
i. Review your life goals. Rebalance and adjust your allocation if your plans changed.
Yesterday I kept an eye on the stock market from 11:00 am to 12:00 nn and from 1:30 pm to the close of the trading hours.
Although there are several factors that can affect the market as you can see, the stock market failed to trigger a small sign of excitement. Generally, the market should raise fresh hopes, optimism and confidence.
Against the backdrop of a weakening peso, rising prices of petroleum and basic food items, huge government debt, and a looming global recession, we have yet to hear concrete economic plans from the new President on how his administration will tackle these challenges.
Meanwhile, let's get updated.
Let's understand that volatility is a friend of the profit seekers.
Remember that we are living in a high inflationary environment. Former BSP Governor and now Finance Secretary Benjamin Diokno tweeted yesterday “inflation will settle between 5.7% and 6.5% in June 2022.”
A. WHAT DOES THIS MEAN?
High prices will continue to erode the purchasing power of your peso.
You need to increase your budget for food, fuel, transport and electricity and so on.
If you receive a salary increase of 5%, good for you! Although, nominally you receive a salary increase of 5%, a 5.7% inflation will just eat up your 5% increase and a bit more, 7%.
In effect, your salary increase will just replace the loss of real value.
So, inflation hurts especially if you did not receive a raise.
Besides, salaries and wages are sticky. Employers do not respond as quickly to the changes in the economy.
Let's say you are afraid of volatility and have been keeping your excess funds [ie you have extra cash after budgeting for essential and non-essential] in bank deposits. You are losing it to inflation because of the rising inflation vs 1% bank interest.
However, you can keep your money in the bank if it's intended for an emergency situation and if you need it in the short or medium term.
B. HOW CAN YOU TAKE ADVANTAGE OF THE VOLATILITY AND UNCERTAINTY?
i. Build extra income stream. Do not rely on a single income source.
ii. Be above the noise. Do not panic. Do not follow the herd. Think long-term.
iii. Do not pull out your investment. You will make more money if you remain invested and if you invest small amounts.
Apply money cost averaging ie break your entire investible funds into small amounts to reduce or neutralise volatility and reduce mistakes, and invest in regular intervals over the course of the period because share prices are cheaper or discounted during these difficult times.
When the economy recovers [and assuming you invested in companies with strong fundamentals], you can expect to gain from each share you bought and accumulated during the market downturn.
Based on studies, you get better ROI in money cost averaging vs investing the entire investible funds in one go.
Also, historically, bull markets tend to last long vs bear markets.
iv. Now is the time to review your life goals and their timing and assess how each asset will help you achieve them. Maybe your plans change and therefore your portfolio needs to adjust as well. Get to know your assets. Maybe you need to diversify your assets to manage your risk exposure.
You can also check your allocation. Maybe you need to invest in defensive assets ie cash and money market if you are close to retirement or you may need to fund projects in the ST or MT.
Should you rebalance your portfolio?
If you are overweight in certain assets that do not make money or give you poor ROI, you can adjust and put more in assets that can provide more growth potential during this time.
C. WHAT UNDERPINS THE ABOVE SUGGESTIONS
i. Mental ability or knowledge. Learn. Work deep within. Oftentimes, the cause of fear is a lack of knowledge and experience. Get your feet wet. Start small. Use micro-steps.
ii. Emotional ability to handle market fluctuations.
iii. Financial ability to afford not to dip into your investments when a financial need arises while the market is on a downturn.