Most often in the past, the reaction of an ordinary person to this reply from a happy investor is to quickly withdraw his entire savings and buy the same stock as his friend's. Then tragedy strikes. The stock market crashes (or goes into a major pull back) a few days later. The poor investor feels cheated (not by his friend but by the stock market) and sells his position despite the very big loss and ends up cursing the market.
80% of People in the Stock Market Loss Money
This typical scenario is also very true. Again, the Pareto Principle of 80-20 applies here. As I mentioned in my previous post entitled "Are you still afraid to invest in the stock market? Do you want guaranteed earnings?", 80-85% of the people who put money in the stock market loss their money. So, these people actually say the stock market is too complicated! Or they might even say "The stock market is manipulated by the very wealthy." Although this last statement might be true in some way, I believe this is not entirely true because the very wealthy people will invest their money not only on stock market speculations but on real economic growth like legit and large sustainable companies . I am pretty sure they don't lie the stock market to crash either because this would affect the economy and if this happens, their investing prospects are also negatively affected.
So, is investing now (November 2010) still safe or will it crash anytime?
I recently received an email from one of this blogs readers asking the question whether it is still safe to invest in the stock market (mutual funds) at this point even if the market has gone up very high already. The person also asked if it would be wise to invest all her savings in a mutual fund company. I'd like to share to you the person's email to me (I will not mention the person's name for confidentiality reasons) and I'd like to also post my reply in this post for everyone's benefit.
Hi, I saw your website (http://investingpinoy.blogspot.com) and I was hoping you could give me some advice. I’m thinking about investing all my savings this week in the ING Dollar Income Fund and Philippine High Conviction Equity Fund. It’s my first time to invest so I know pretty much nilch about the market. Since it’s been doing so well lately I’m afraid that I’ll be buying at a too high price and that it’ll crash. Do you think now is a good time to start investing or should I wait?Here's my reply to the email:
Invest Your Savings Only When You Have ENOUGH Savings
First of all, congratulations on deciding to invest!
My suggestion is DONT invest all your savings unless you have another fund that can be used for emergencies. One needs to have savings used solely for emergencies (like getting sick, accidents and other unexpected expenses). At the least, leave 3 months worth of savings. Say, your living allowance is P20,000.00 per month, you need to have at least P60,000.00 in your savings. Some financial advisers even say it should be 6 months. Personally, I’m building my savings for one year and the reason is so that I can spend a one year vacation without having to work.:)
If this is already done, then the rest of your money can be invested in high yielding instruments. I noticed you are looking at investing in mutual funds. Mutual funds are alright. It is indirectly investing in the stock market since the fund manager of these mutual funds invest your money in the stock market. And, when you invest in the stock market, it can go up or down, so there is no guarantee. You can only hope your mutual fund manager is good at what he’s doing.
I am not familiar with both ING Dollar Income Fund and Philippine High Conviction Equity Fund. What you can do is do your own research on their previous performance and if you are happy with the returns, then go for it. Again, I’d like to warn you that past performance is just that...PAST. It means they can’t guarantee that this year and the next ones will still be the same. It’s just an indication that they have grown their funds very well in the past. There are a lot of mutual fund companies out there and you can check their performance in the website http://www.icap.com.ph/. Choose from the list and start investing.Money Cost Averaging is the Way for Beginners
By the way, in investing, you can either put a lump sum and let it grow or what’s better is do a money cost averaging (see my previous post about money cost averaging) where you invest equal amounts of money every year. Say, if you have P100,000 to invest, you can decide to invest P10,000 per month for the next ten months. Or decide to invest P5,000.00 per month for the next 20 months... and so on. Money cost averaging is a safer way to invest your money and a faster way to grow your money.Again, is investing now (November 2010) still safe or will it crash anytime?
Regarding your last question whether this is the right time to buy because you are concerned that you might be buying at a high price, my answer is two-fold. At this point, most companies listed in the stock market are already fairly priced, meaning they are neither overpriced or undervalued. So, if you are the investor, this means you are buying at the fair market price and may mean you have reached the peak price already. But, the market indicators are positive moving forward to the year 2011 and beyond. Company prices will most likely be re-priced by January 2011 (see Citiseconline's new target prices in my previous blog post entitled "Are you ready for the Bull Market this year 2011?") and would give us an opportunity to invest with the hope of market prices following this price adjustment. In other words, if a company’s book value is P10.00 and the market price is also P10.00, it is fairly valued. If the market price is P8.00 it is undervalued which means you can expect the price to still go up. But if the market price is 12.00, it is overpriced, which means anytime it could (or could not) go back down to its book value. So, you are looking at buying companies that are undervalued. At this point, my suggestion is to choose the right mutual fund company with a good track record since you are not investing directly in the stock market. As of today, I think the market will continue to go up with a few corrections (pull backs).
I hope this helps. Just let me know if you have any other questions.
Many thanks again for asking you question.So, can you comment on the post? What do you think about investing your entire savings in the stock market or other aggressive investment vehicles? Do you agree that it is still good to invest in the stock market today because the market will continue to rise? Or do you think the stock market will crash?
May you achieve true success!
Bryan
PS1. What does the Bible say about wealth? Is money the root of all evil? Visit http://www.beyondprofit.blogspot.com/.
PS2. If you want to invest in real estate properties, visit www.houseforsalephilippineswithphoto.blogspot.com.
PS3. If you want to get financial literacy training for free, go to www.wealthacademy-philippines.blogspot.com.
Investing Pinoy
