The one and only certainty about stocks

Now that you know what are stocks, you might still be thinking that stocks are risky and you shouldn't put money in there.

You are right and wrong at the same time.

In order to answer your doubts, I must differentiate between short term and long term.

Short term:

Short term for me is 10 years or less. Indeed, there is a chance that the valuation of your stock portfolio will show low return or negative return. For example, you invest all your money in stocks and just after you did, there's a market correction. Meaning that all the stock prices went down. Of course, you'll feel bad because what your shares worth is less than what you paid for.

BUT

Long term:

In the long term, meaning 10 years or more. The valuation of your stocks will always be more than what you bought them for.

Let's see the following graph that shows the performance of the Philippine stocks since 1986:

Do you remember the Asian crisis in the end of 1990s when everyone lost money in stocks and the whole economy slowed down?

Indeed, the stock index went from 3800 points to a lower 1700 points. That's more than half the value before the crisis. Meaning if you had P1 million in stocks, it was worth less than 500,000 pesos during the crisis.

But don't be afraid, because as long as you don't sell your stocks, you haven't lost money yet. Let's see what would happen if you held on your stocks despite the bad performance: the stock index topped 6200 points 15 years later which means that the stocks you bought for 1 million before the crisis is now worth P1.6 million. You didn't lose money, did you?

Even more interesting: if you bought 1 million pesos of stocks in the middle of the crisis when the index was at 1700 points, it would be worth P3.6 million now!

I hope you start understanding my point. If you hold the stocks for a long time, it's not possible to lose your money. Even during the worst financial crisis the Philippines went through, you would get your money back and as of now, it would have showed a substantial positive return AS LONG AS YOU KEEP YOUR STOCKS FOR THE LONG TERM.

Another important conclusion must be made: IF you buy stocks in the midst of a crisis , market correction, market crash (it all means the same), your RETURNS WILL BE SO HIGH as long as YOU WAIT LONG ENOUGH.

As a conclusion: if you are old and close to retirement, investing your savings in stock is not wise because if you encounter a market correction, you might lose money. It will take time (5 to 10 years) to recover from the loss. You might not be able to wait that long. I'll explain a strategy to avoid losing money just before retirement in the following posts.

If you have any questions about stocks or if you want to meet with one of us to talk about your plans to become a millionaire, send us an email at pinoyfinancialcoach@gmail.com.