|
The
drama of the financial turmoil in the United States
continues to unfold as each week passes by. Financial
analysts and investors alike there are keeping a close
eye on the housing market. Moreover, they want an
assurance that bank write-offs due to soured
mortgage-backed securities have been fully disclosed.
Some
experts say that it will take more than a year for
everything to be sorted out. For one, the housing market
in the US has not reached a clear bottom yet. Two, there
is a growing concern about inflation, which could put on
hold the US Fed’s interest rate cutting tack.
All
these uncertainties cause investors to stay on the
sidelines, hold on to their investments, or take a loss
and stay liquid. The first and last one runs counter
course to what an investor should be, at least in my
opinion. The fear of the unknown is not just a facet of
life, but also a facet of the investing world.
Rational
panic
When
people are jittery it causes panic-selling (of
investments) and belt-tightening (of consumer goods
purchases). The uncertainty of the US economy and the
underlying sectors—particularly the banking and property
sectors—cause uneasiness, and people are thrown into
distress. There’s irrational exuberance, and then there
is rational panic.
Rational
panic sinks in when a person makes investment decisions
based on fear. Since something is going to go wrong with
the economy (hence their investments, too), they would
sell it at whatever price and choose to stay liquid. It
certainly makes sense, at first. Then, on hindsight,
this investor realizes that he exaggerated the
uncertainty and is forced to repurchase his investment
at a steeper price.
Indeed,
there is nothing to fear but fear itself. Investments
run its course and its cycle based on economic
fundamentals. But the buck doesn’t stop there. It also
hinges on sentiment, that is, investor sentiment.
The
financial cholera
The
uncertainties that abound in the US have spread
worldwide like an infectious disease. While some
economists talk of Asia decoupling from the US, stock
markets in Asia seem to belie that observation. As much
as I would like to decouple my own discussion away from
the stock market, it is quite difficult not to.
One need
not look farther than our own stock market. There has
been net foreign selling since January, although there
are signs that it could be tapering off. Our own stock
market performs almost slavishly to how the Dow Jones
performs.
Apart
from the stock market woes, banks worldwide had invested
in US-mortgage-backed securities because they thought
these were safe. Due to the subprime losses, banks were
caught unawares and therefore had to scrimp on credit
lending. Furthermore, the losses that spilled over from
investments in mortgage-backed securities, which some
banks held in high amounts, made an impact on their
financial statements.
Some
banks did not want to announce losses nor write-offs
until the end of their fiscal calendar. This created
uncertainties and, therefore, whenever there was news
out on subprime or these mortgage-backed securities,
investors were caught running to the exit. This
therefore compounded the problem of investor sentiment.
But
that’s just one side of the coin.
These
banks, particularly those in the US, in an attempt to
shore up capital, will sell off some of their
investments. These investments include those made in the
stock market—both local and offshore. Given the strides
Asian stock markets had made in the past few years, it
is, therefore, not surprising that these US and foreign
banks begin to cut down on their exposure to these
emerging markets, the Philippines included.
As an
investor, you begin to realize that no economy is an
island. The world is not called a global village for
nothing. Yet, the question still remains, where do you
put your money?
Limited
investment alternatives
Make a
check of the yields of the various mutual funds (www.icap.com.ph)
available and it will reveal that funds that have
equities have negative returns year to date. Our stock
market has seen heavy foreign selling since the start of
the year, and that took a toll on the market. The heavy
selling dampened local investor sentiment to attempt to
buy into stocks that appear to be inexpensive.
However,
the current crop of investors is lucky. Unlike a decade
ago, we now have our own institutional investors in the
form of mutual fund and unit investment trust fund
managers. Trading volumes could still be considered
light, but there is definitely a growing domestic demand
in the stock market.
There is
really a limited set of choices as to where people can
invest their money in. While the dilemma of the poor is
how to make money, the middle class has a bigger problem
of how to make their money grow. The choices the middle
class makes will ensure that their succeeding
generations continue to prosper.
In
general, the available investments are stocks, bonds,
real estate, government securities and pooled funds.
Some consider putting up a business as an investment,
too. One thing is clear, though—putting your money in a
savings account definitely does not qualify as an
investment.
The key
decision factor
The
current global economic backdrop provides an acid test
for newbie investors. These investors have probably
heard of the great returns a friend or a family member
had with their pooled fund investments. Now, with the
added insight on the volatility of investments, they
will now have to think wisely before they make a
decision.
The most
important task any would-be investor should do is to
first set up an emergency fund. The emergency fund
covers the person’s six months’ worth of expenses. The
six months is a minimum and is also dependent on how
dynamic the industry the person belongs to is. For
example, if a call-center agent wants to move to a new
company, six months might be too long.
The
setting up of an emergency fund will ensure that an
investor does not put his entire savings into a
diversified investment portfolio. Some people tend to
give in to their greed and place all their money in
investments. Remember, investments tend to be volatile.
You do not want to pull out money from your investment
for an emergency and realize the investment is at its
lower NAV or share price or bond price.
Making
money grow through investments will always have its ups
and downs. In this time of financial cholera, what you
need is less of panic and more of wisdom and patience.
****
Sherwin Chan is affiliated with Sun Life of Canada
Philippines. He also trades in the stock market and is a
member of Absolute Traders. He is a Registered Financial
Planner. He maintains a blog at http://guerilla-investing.blogspot.com.
You may reach him at
guerillainvesting@yahoo.com for your insurance or
investment needs.
Join the 10th RFP Program (April 12 to May 31, 2008).
Visit www.rfp-philippines.com or inquire at info @rfp-philippines.com/Tel.
No. 634-2204. |
