Stocks strategy: Fight or flight?

INQUIRER.net

Question: Early last year, I invested in an equity unit investment trust fund. Since the stock market took a nosedive, the value of my investment has gone down and it has not recovered. I’ve been thinking if I should get out of it to cut my losses. But what if the market goes up? What should I do? – Ric

Answer: Stocks are a very volatile and risky investment. Every day, every minute even, prices of stock prices change in the market. There may be a gain today and a loss tomorrow--that is why the risks are high.

Over time, stocks will definitely peak and plunge depending on what’s happening in the world and in the financial markets. When stock prices are at their peak and trading is voluminous and fast, we have what is termed a bull run in the market. When stock prices plunge and trading is slow, that is called a bear market—what we have right now.

It is inevitable that stock prices will go up and down. According to the book The Citibank Guide to Building Personal Wealth, “Benjamin Graham [well-known investor and professor of US millionaire Warren Buffet] stressed that the stock market prices are irrational and are driven by ‘market sentiment,’ or how investors are feeling at the time.” One should thus take a long-term view instead of looking at the short trend and panicking. So it’s a bear market now; stock prices have plunged down. Should you get out? Not if you don’t need the money next year. If you have the luxury of time, ride out the current market plunge and reap the gains in the years to come.

Warren Buffet is known to be picky about the stocks he buys. He has been described as a “value investor.” More than looking at the short term and projecting the short-term capital gains he may get from trading stocks, Buffet looks at the long term and the fundamentals of the company.

Investors will do well to take the cue from Buffet. Don’t panic at short-term trends. Ask yourself: “Have the fundamentals of the market changed? If not, and I was willing to hold when prices were higher, why am I not willing to hold when the prices are lower?”

The fact is, if the company is sound and has a good earning potential and a small debt-to-equity ratio, and if it is professionally managed, chances are its stocks will earn value over the long run.

Also, just as the recent market meltdown was swift, the next market recovery may be so rapid that you’ll be taken by surprise if you are not staying invested in the market. Thus if you don’t need the money in the short-term, it may be wise to keep the money in the equity fund you invested in anticipation of potential benefits in the future.

We are not fortune-tellers so we cannot accurately say when the stock market will recover. However, financial experts have said time and again that stocks or equities outperform other asset classes in the long run.

Here are some tips to maximize your investment in equities:

1. Choose stocks expected to grow well. “While as a private investor you cannot realistically hope to be outstandingly successful in picking individual stocks, you can choose to weight your equity portfolio towards markets and industries that are expected to grow well over the long term,” advise the authors of The Citibank Guide to Building Personal Wealth.

2. Consider investing in equity mutual funds or unit investment trust funds rather than individual stocks. Doing so will help you diversify your investments (thus diversifying the risk) and allow you to invest with a small amount of money. Mutual funds and UITFs are pooled funds, meaning, money from small investors are pooled together and invested collectively. Investors don’t have to shell out a lot of money to take part in the markets.

3. If investing in individual stocks, choose companies with a good track record—no scandals or rumors of mismanagement. Also keep an eye out for companies with a good profit record and a low debt-equity ratio.

4. Invest for the long haul. Ride out those market fluctuations and enjoy the gains in the future.

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