“I am a very conservative investor, can I still invest in equities?”
This type of question is typical from older people who consider themselves as “sigurista”. There is no English equivalent of the word. Perhaps the closest term to it is ultra-conservative. And when I reply to this type of question coming from mostly senior people, I answer with a question, “do you like to earn a lot? Better than what you are doing today?” “how would you feel that 10% of your portfolio will earn as much as the other 90%? I also ask them why are they so apprehensive about the risk of investing in stocks specifically? But is comfortable in putting into high yielding investment programs. Isn’t it avoiding risk is a risk as well?
Clearly, investors like these need to be enlightened about the basic principle of risk and reward. Then next to be enlightened about equities. They thought stocks are very risky instruments even if it is a managed fund. I am sure they like to earn more, but by earning more means risking more. This is another behavior that makes the investor vulnerable to investment scams – which offers a higher and guaranteed return and without so much risk. Ignorance is really a bliss according to my friend. But in investment, ignorance is very costly behavior which will not only lead to actual losses, but lost opportunities as well. Mind you, as of this writing, there are more people who got scammed with a promise of guaranteed returns than people who are into equities. No wonder up to this time, investment scams proliferate. From where I came from about weeks ago, there was a scam happening providing 15% return every month, guaranteed. And I learn the most recent investor is a bank manager.
Most are apprehensive about equities or stocks. I am not sure where this is coming from. Perhaps the volatile nature of the market and the continued pessimism of losing investors contribute to this negative notion. But generally, most people would like to venture into business oblivious to the fact that investing in stocks is like partnering with a business enterprise after all. Moreover, I would say that not all equity funds are created equal, some equity funds are more conservative than others in the same manner that not all stocks are the same. There are conservative stocks and there are aggressive stocks. Therefore, on this light, even an ultra-conservative investor can invest in an equity fund. And investing a small amount or percentage of the portfolio is also a conservative approach.
Push it further, here are some more consideration, why and how an ultra-conservative investor can invest in an equity fund. One, consider a longer time horizon. The volatility of the market is mitigated through time. Statistically, a one year investment horizon could lead to losses. But on a five year time horizon, the potential loss is eradicated. Looking at the PSEi history since 1986, a five year rolling period since then, produced no negative results despite going through occasional crises. This is so even if one has invested at the worst time.
Secondly, allocate a small percentage of the total portfolio in stock funds. Say 5 percent is relatively small and conservative. Note that this allocation to stocks will never run out or go to zero. Hence, the risk is relatively small. More so, if the investor understands averaging, he / she can consider moving the earnings of the fixed income side of the portfolio to equities. In about 5 years, the results will just be positive.
Thirdly, learn and understand that equities or companies within a managed fund are profitable and therefore has value. Look at the financials of these companies and know that each has and intrinsic value called book value. It is computed as total assets minus total liabilities divided by its outstanding shares. This value tells us that each company has a residual value which as a stockholder has the right to claim on it. It is like a recovery or salvage value of the company implying that the stock will never be naught of financial value. Understanding also that fund managers are aware of this valuation and considers this at some point when they are investing client’s money.
All told, the above consideration when put together, even the most ultra conservative investor should really invest in equities. More so, that the Philippines is already and investment grade country, how come its constituents continue to be below investment grade?
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