Why it is not safe to just “invest long-term”

(If you want a quick guide for beginners how to start investing in the Philippine stock market, you can download your free ebook here.)

Proud member of the long-term investors club?

If you notice the theme in many discussion threads in several investing forums about trading in the Philippine stock market, not a few are actually talking about support/resistance levels for proper entry/exit, waiting for dips or breakout before getting in, or waiting for the best set-up to get the best possible timing to buy/sell.

In short, these people are doing some sort of market timing – or in simple terms, catching the “almost perfect” time to buy and sell stocks. There are even so-called day traders or those who buy and sell stocks within a day. And if you’ve been in the market, you’ll agree if I’d say that the great excitement in trading only ends when you see find yourself on the losing side of the trade. (If you want to understand the very basics of market timing, you can watch this video.)

That’s why many investors, especially newbies, later on, go to the other end of investing approach – that of going long-term. In fact, many are strong advocates of this type of strategy.

But is it effective?

What generally happens if you stick to your long-term horizon and you don’t sell your stocks during this entire period? Like you intend to keep it for, say, a minimum 5 years?

Do you believe that being focused on eyeing stocks that are “good for long term” generally safe?

(If you want a quick guide for beginners how to start investing in the Philippine stock market, you can download your free ebook here.)

The KEY to long-term investing

Well, the safest answer is: IT DEPENDS!

You see, we’re now talking about one of the most important aspects of any investment – RISK!

So some few words first about this “risk”.

First, we need to agree that there’s no investment that’s 100 % free from risks!

Even the money that you park in your bank which you believe is safe is actually exposed to the inflation risk!

If you simply save and don’t do anything about it, then you’re sure a loser every year because of the losing purchasing power of your money at hand.

Now going to the world of the stock market, as with any investment, there is also no such thing as safe in any market.

The truth is, whether you’re investing for the long-term or having that active trader approach, you still should monitor your stock investments with the current price trends and events, the frequency of which depends on your own personality, style and goals.

However, and more importantly, you simply can’t overstay in the stock market or invest blindly and hope you are up after 5 years. Stocks that keep on going down even if you keep it for several years are not unusual!

A long period of investing doesn’t guarantee profit

In fact, even the companies you may consider good now didn’t have, at least on one point, good returns even for a 5-yr holding period.

Take a look at stock Megaworld Coporation (stock code: MEG) as an example. The chart is shown below for a period of 8 years from 2004-2012.

Imagine yourself learning about the stock market as a newbie at this time, buying this stock at the peak of 2007 when the price was more than Php 4/share. After it reached its peak, it started going down…and down… and down…bottoming in early-2009 and recovering after.

Guess what happened even after five loooong years?

The price was only around Php2+/share!

If you invested your life savings blindly that 2007, or worse, your retirement fund, I don’t think you’d have a good night sleep. Until after around 7 years, it still did not reach the 2007 highs. (Now as of April 29 2015, its current price is only at 5.33).

Down by 75% after 10 Years

Let’s take a look at another more recent example: Cebu Air Inc (stock code: CEB).
Below is its 5-year chart up to May 29 2020 (with the COVD-19 crisis still ongoing).

If you look at its entire price history, you will be having this.
Excluding the dividends it gave, a buy & hold strategy for almost 10-year period gives a disappointing -75% loss.

So what’s the key to the so-called investing for long-term?

If you want to go long term like more than 5 years, then it’s very important to choose companies with good long term fundamentals and those that can in simple terms, earn consistently and outlast even your lifetime. (I can honestly think of AC and SM)

The main risk with this approach is that fundamentals change over time. In other words, great companies we have today may not remain that great after a year or two. Reasons could vary – a shift in the political landscape, changing government regulations, new technology, or general market sentiment swings.

Also, don’t forget to look at company’s growth potential as well to optimize your investment.
Looking at growth in sales and revenue year on year can be a good start. This is where good researches coming from your stockbroker may help.

Once this careful stock selection is done, the next you need to manage is your attitude and discipline towards those investing goals. Proper monitoring from time to time remains essential.

Be vigilant in sticking to your horizon if the reason of your buying it is still intact!
Otherwise, if the main basis of your buying seems to no longer hold, I don’t see any point why you would keep it any longer.

Different strokes for different folks

Lastly, different persons have different risk profiles and goals in investing.

Short, mid and long-term investing all have its own pros and cons, which anyone should be aware of.

Again, if you go long-term, then the key is in choosing the companies that will have consistent growth earnings. This doesn’t mean that stock monitoring is no longer necessary You still do – for the purpose of checking whether the basis of your “long-term investing” remains intact.

Online stockbroker COL Financial even shared some studies that if you do long-term using Peso Cost Averaging, then carefully chosen individual stocks could give you 10-20% annual returns in 20 years span.
(You can watch the video below where I shared basic strategies to investing in the Philippine stock market.)

Another safer approach is to invest in Philippine index funds. Here, you follow the index as a whole basket of 30 stocks, and not be heavily invested in only 2-3 stocks you hold. You risk is greatly reduced since it’s much rarer compared to a single stock that an index can remain low for an extended period of time.

If there are people playing with resistance and support, that’s because it’s their chosen style. They decided to be more active players, something you don’t really need to imitate if you’re not that type. (In case you wanna explore this possibility of earning more, you can check out my highly recommended Full Trading Course here, where you can equip yourself with comprehensive Technical Analysis.).

But then, market goes in cycles, which means theoretically if you want to maximize your returns, you should at least sell at the peaks of bull cycles and buy at the bottoms of bear cycles. The subject of technical analysis can help you recognize those market phases, something much easier said than done.

In the end, if you think of it, the price action of the stock is the one thing that will really matter for us retail investors. Whether a long- or short-termer, you’ll earn capital gains ONLY when you sell at a higher price than you bought it. If you’re able to time the bottom of the market, that I believe is the best scenario you can ever have in multiplying your money through stocks. Buying close to it is next and more doable.

Enough said.

So… are you also going for the long-term? Why or why not?

Share your comments and experience below.

Have fun investing,

oMeng 🙂

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