WITH global markets in turmoil, it is safe to characterize events as a downturn both in listed equities and in the bond markets.
Since the start of this year, listed equities in the major US markets Dow, S&P 500 and Nasdaq have gone down by as much as over 30 percent! Even our battered PSEi has gone down more than 10 percent since the start of the year.
The bond markets have, likewise, taken a major hit. When interest rates rise, the market value of the bonds goes down. This is because when interest rates go up, bonds in the secondary market need to keep up with the current yields and, therefore, are sold at a discount over face value to provide the additional interest-rate difference over the coupon.
Even during the height of Covid-19, things never got this bad.
Going into a bear market just as we are recovering from the global pandemic is not the best thing that can happen to most investors. Fear and uncertainty can lead many people into a panic selling mode. Is this the most rational thing you can do?
If you had sold out and liquidated your portfolio just as the market was heading south at the early part of this year, it might be best to stay out of the market for now. However, if you are still on board, you may want to reconsider your options.
If you are holding on to short-term bonds, which are currently being sold at a large discount over face value, perhaps it is best not to sell and just wait for the bonds to mature. This is because when they mature and are redeemed, you still get the full face value of the bond without having to take a loss by selling at a discount. Sure you may have an opportunity cost by having a lower coupon yield until the bond maturity. But will that be enough to make up for selling your bonds at a discount?
The equities markets are somewhat a different animal from bonds. There is no specific maturity date or interest yields in equities. Even dividends are not the primary source of yield for equities, it is capital gains in the form of increasing share prices.
You may want to rethink your initial reaction to cut loss and sell in a market downturn, for a number or reasons. First is that downturns are temporary and if the company is a good one, its share price will recover. Of course there are exceptions in expecting an upturn, such as when the company goes bankrupt or, in the case of certain cryptocurrencies that have intrinsically no value, posts losses.
The second reason not to sell is that it is not possible to time the market. Imagine selling today and the market starts to recover the following day. Of course, it is possible that the market just keeps on dropping.
If your intention is to sell now and buy back when it hits the low, no one can predict that; so you can just get whipsawed. And you have to remember there are friction costs involved such as trading fees and taxes.
Finally, although I am sure there are other reasons, staying in the equities market over very long periods of time, like several decades, has always paid off, provided you know how to diversify and choose solid companies. Any downturn can be viewed as a momentary aberration.
Having said all that, you have to remember that ultimately, only you can fully understand your investment needs and financial situation. Of course, you always have the option of asking for a second opinion, but I would suggest that you choose wisely who to get advice from.
How did you expect someone who has no money tell you how to make money?
George S. Chua, president of the Financial Executives Institute of the Philippines (Finex) in 2016, is currently a professorial lecturer at the University of the Philippines and an active entrepreneur. Chua’s views and comments are his own and not of the BusinessMirror or Finex. Comments may be sent to email@example.com.