Have you lost money investing in a Stock Mutual Fund?
I have two friends ask me that question in two separate occassions.
My reply has always been the same: “Yes and No!”
Am I crazy? How is it possible that when you invest, you can lose money and not really lose it at the same time?
A detailed answer to that question will be provided a little later in this article.
But first, let me continue on some more tips on How to behave when the Stock Market is down..
Previously in part 1 of this series, I shared the following tips:
1. Don’t panic. It is the nature of securities investments to move up and down in values. But stocks as a whole rise more than they fall, especially if you hold on for the long term.
2. Stop listening to news of doom and gloom. Instead of listening to naysayers, why not check with your financial advisor? That’s tip #3 below.
3. Consult your Financial Advisor instead of your neighbors or your equally ignorant friends.
“Learning to invest on your own is like going to the school of hard knocks, which can be a very expensive teacher. Getting an adviser or being with others is a good tack.”
–Robert Stammers, Director of Investor Education at the CFA Institute
Here is a quick question for you: When reading a newspaper, do you find yourself hurrying up to the Business Section and then read every page in there?
Well, if you are like most newspaper readers, the obvious answer is “No”.
You’d rather want to proceed to the most exciting part of the news, which is none other than the Entertainment Section, right? It’s like your brain is naturally hardwired to go after the latest Showbiz Chikka.
If you are like most individual investors in the Philippines, the following may be true to you:
- You don’t care to read the Business News.
- And even if you do, you can’t understand a single thing about those graphs about the Philippine Stocks that they never miss to print.
- You’ve got a busy schedule – work, business, children, etc.
A friendly suggestion if you are in this category: Get help — not hype — from a competent financial advisor, instead of trying to do it all by yourself.
Any financial advisor worth his salt should be aware of what is happening in the market and should be able to answer your questions.
Once in a while, and especially in challenging times, you should drop him/her a message.
(A good read: The risks of investing.)
4. Keep your goal in mind and remember your investment Time Horizon.
“You don’t have to be brilliant, only a little bit wiser than the other guys, on average, for a long, long time.”
–Charlie Munger
Well, if you stop investing now when your total investment is just P 200,000 in 12 months, your financial goal might never see the light.
If you have just invested for 12 months, well, you still have 228 months more to go before you hit your 20-year (240 months) investment horizon!
So keep an eye at your goal. And remember you are investing for the long term.
(See also: How to setup an Emergency Fund.)
A couple of months back, I mentioned to a client that I am investing for as long as I live!
That’s right! I’m investing regularly, religiously, month after month whether the market is up or down, and I hope to do this until the day I die.
And when Mr Undertaker finally comes to take me, my co-investor takes over the investment and hopefully continues to do it.
5. Keep investing.
“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”
–Warren Buffett
This may sound counter-intuitive, and to the uninitiated even oxymoron, but it makes a lot of sense.
In a down market, the prices of stocks are very cheap (read: deeply discounted). So that means you are getting a bargain price.
Therefore if you invest in a down market, you are essentially buying more shares than when you invest when stocks are going up in value.
There is a technique called Cost Averaging which means investing regularly a certain amount of money — say P 15,000 every month — whatever the market condition is.
As an investment strategy, Cost Averaging is known to reduce the cost of shares and so it is advantageous on your part.
(See also: Saving vs Investing — Learn the Difference.)
Paper Loss / Paper Gain
Back to the question at the start of this article, “Carlos, have you lost money investing in a Stock Mutual Fund?”
Well, the seeming contradictory answer has to do with the concept of Paper versus Realized Gains / Losses.
When investing in securities (Stocks, Bonds, UITFs,REITs, Mutual Funds, etc), profits and losses are only realized the moment you sell the security — meaning, turning your assets into cold cash.
Otherwise, profits and losses merely appear on paper. That is, color RED at the bottom line of your Investment Account means Paper Loss; color BLUE (or BLACK) almost always means Paper Gain.
That said, when the Stock Market is down — and you have invested in a basket of stocks — the two recommended actions to take are:
- Do nothing. If you are fearful, just wait. The market will eventually bounce back. You just have to be patient.
- Invest more. Take advantage of the cheap prices of stocks. This is the best route to take.
Warren Buffett (again) likes to do bargain hunting when buying stocks. He said, “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
You should do it, too.
However, the last thing you don’t want to do in a down market is sell your investments.
Remember: Losses only appear on paper unless you decide to sell.
So yes, it’s true: I’ve lost money (on paper) investing in a stock mutual fund.
And yes, it’s also true: Ive not really lost money since I was disciplined enough not to withdraw my investments at the wrong time.