Making investments work in challenging times

Making investments work in challenging times

Volatile and uncertain times present both pitfalls and opportunities

By Joel V. Nigos

May 4, 2009


In the past several months, investors have been uneasy amid the volatile global markets. Some investors consider holding cash or deposits understandably to minimize the risk on their investments. But once inflation starts picking up, this action will not only provide them with lower returns but will also diminish their purchasing power. There is no cure-all to turbulent markets but there are strategies to handle them. Historical data shows that financial markets will not trend downwards forever as economies grow and mature over time. While the current market volatility should not be taken lightly, long-term goals are the ones that really matter.


Theresa Marcial-Javier, President of the Fund Managers Association of the Philippines and Senior Vice President for Asset Management and Trust Group of Bank of the Philippine Islands, believes that a relatively large portion of the population remains apprehensive when it comes to investing in higher yielding assets, perhaps because of fear of losing their hard-earned cash or simply due to lack of information. She relates, however, that investors who take time to understand the risks involved can effectively mitigate their risk exposure by choosing an investment outlet that best matches their risk tolerance. Ultimately, the returns that can be reaped from a little initiative to educate oneself can be truly rewarding.


The global credit crunch


One of the primary reasons for the current risk aversion among investors is the financial crisis globally that emanated from the housing market troubles in the United States. The collapse in U.S. house prices and the resulting delinquencies and foreclosures in the sub-prime market had left adverse consequences for banks and financial markets around the globe. The crisis, which had its early roots in the closing years of the 20th century, became apparent in 2007 and had exposed pervasive weaknesses in financial industry regulation and the global financial system.


The risks to the broader economy created by this housing market downturn and subsequent financial market crisis were primary factors in several decisions made by central banks around the world to cut interest rates and governments to implement economic stimulus packages. These actions were designed to stimulate economic growth and inspire confidence in the financial markets. Effects on global stock markets due to the crisis have been dramatic. Between Jan. 1 and Oct. 11, 2008, owners of stocks in US corporations had suffered about $8 trillion in losses as their holdings declined in value from $20 trillion to $12 trillion. Losses in other countries have averaged about 40 percent. Losses in stock markets and housing value declines place further downward pressure on consumer spending, a key economic engine. Leaders of the larger developed and emerging nations had met in several occasions to formulate strategies in addressing the crisis. While many of the root causes of the crisis had yet to be addressed, a variety of solutions have been proposed by government officials, central bankers, economists and business executives to mitigate its impact in the global economy.


As a result of the global uncertainties, appetite for commercial papers and funds has dampened considerably over the last few months. Ms. Javier, however, sees that in today’s situation, investors should look at the broader perspective instead of being sidetracked by short-term returns. Investors should diversify holdings to spread the risk and stay on course as those who are able to ride turbulent markets reap their rewards over time. While there are no guarantees to successful investing, discipline in sticking to one’s investment objectives remains the guiding principle that allows long-term growth in personal wealth.


Turbulent year


The Philippines was not spared by the credit crunch that hit the global markets last year. Most mutual funds in the country experienced severe declines in value, wiping out gains earned in previous years. Even the supposedly low-risk investments such as bond or money market funds suffered. But as assessed by credit rating agencies and global financial institutions, the country remains better off and is predicted to weather the crisis. In fact, the first quarter performance of the Philippine Stock Exchange has shown signs of light at the end of the tunnel, rising by 6.05 percent and leading the equity market in the Southeast Asian region. This surge is currently sparking discussions among local stock traders and analysts on whether the market has bottomed out and if it is the right time now to buy stocks again.


Time-tested concepts


There are also time-tested concepts and principles that can serve as guides for investing. While an investor would generally have any of the following reasons for investing – regular income, wealth accumulation, capital preservation, retirement, child education, business formation, “no two persons are alike”, according to Citibank Personal Finance Primer. The investor therefore must determine his own investment goals and assess the investment product and risks he is willing to take to attain his objectives.


No matter how trite the saying is, “Don’t put all your eggs in one basket” is one of the tested principles in investment management. Diversify the portfolio to ensure that funds are distributed among several different investments or instruments to spread out the risk. The more diversified a portfolio is, the less vulnerable the investor will be to the poor performance of a single investment.


“You cannot have your cake and eat it too” as also an applicable concept in investing. This refers to the Risk and Return proposition of an investment. Higher returns are accompanied by higher risks and vice versa. It is therefore important for an investor to be cognizant not only about the benefits but also the risks associated with his chosen investment.


Another important factor to consider in investing is the investment horizon. The investor should first assess how long he intends to hold on to the investment. If one prefers to invest only in the short run, he should place his funds in less risky and easily liquefiable products such as time deposits, Treasury bills, and money market funds, among others. But if the investor is willing to accept a higher degree of risk and wishes to invest for a long period of time, he may feel comfortable investing in relatively high yield but also high risk products such as equity mutual funds, unit investment trust funds, or foreign exchange trading pool.


Lastly, one must also keep in mind the amount of investible funds he’s willing to invest. Most financial experts suggest that prior to investing, one should set aside cash reserves equal to at least six months of normal expenses.


Making investments work


Wilfred Son Keng Po, Managing Director and General Manager of AIG Global Investment Corp. Philippines, believes that the credit crunch has taught investors the importance of diversification. Nevertheless, investors should still be careful in taking huge bets since now is not yet the right time to be too aggressive. “There might be room to start dabbling in more risk-related investments but it’s better to be more aggressive once the inflection point definitely points out to a positive signal”, according to Son Keng Po.


As for looking for opportunities, Son Keng Po thinks that opportunities can be spotted by constantly analyzing the data that are coming out here and abroad. One should always constantly keep abreast of the news in the marketplace and analyze them accordingly. He adds, “Missing the first 10 percent of a definite bull run should not dissuade investors especially if the inflection point for a strong upturn of the markets is seen. One should always look at excesses as opportunities whether it will be on an upturn or downturn.”


Even with the current situation, investors should stay invested and make investing work for them. “There are always right investment outlets at any point in time. The wrong investment strategy would be to just put your cash under the mattress because a positive return albeit small is still realistic,” stresses Son Keng Po. “We should slowly come out of the comfort zone and make our money work,” he concludes.


While all investments entail benefits and risks, market volatilities also present risk and opportunities. Reaping the benefits of good investment decisions requires discipline, prudence, careful assessment and spreading of risk – factors that make investing truly work in good – and even in challenging times.