Delicious ups and downs of stocks
Question: How can an investor possibly make money in a stock market with unending ups and downs? It is keeping me up at night and jittery during the day. (Asked at “Ask a Friend, Ask Efren” free service through www.personalfinance.ph, Facebook, and SMS).
Answer: Observe motorcycle drivers in the streets of Metro Manila. These drivers hardly sit still. They are very nimble, weaving in and out of traffic in order to get to their destination faster (and many times at the cost of angering non-motorcycle drivers).
Is the above-mentioned driving style of motorcycle drivers risky? By all means! So, why do they still do it?
Apart from the potential of getting to their destination early, being always in motion minimizes for motorcycle drivers two difficult things during slow moving or standstill traffic: 1) having to lean on one foot while keeping a heavy piece of machinery upright; and 2) having to endure the heat and humidity with all of the protective gear they have to wear.
The Philippine stock market is not necessarily great for a buy and hold strategy. After the merger of the Manila and Makati stock exchanges and the use of a unified index, the annual compounded return of the Philippine composite index was only slightly over 8%. Yet, many investors and funds had earned higher returns, all of which was facilitated by trading.
Just like the driving style earlier mentioned, trading involves weaving in and out of stocks to get to the target returns faster. Trading does not require that funds be always invested in stocks if the returns cannot be had.
Is trading risky? By all means! Not only will transaction costs be higher, the chances of making the wrong trading call can also lead to larger capital losses. Trading can keep the investor awake at night and jittery during the day.
But just like the agile motorcycle driver, the person who trades keeps his eye on his destination and plots his moves way ahead of time. And the more he plots, the more his moves become second nature to him. The rules of trading become so automatic that he hardly does much thinking for routine situations (i.e. major stock market moves like crashes and crazy run ups are unique situations).
A trader thrives on the ups and downs of stocks, which are otherwise known as volatility. To a trader, volatility is the seasoning to an otherwise drab and dull investing experience.
Not all can be traders. Not all can trade for others as this is reserved for the professionals.
So, if you want to take advantage of the delicious volatility in stocks but do not have the stomach for it, why not just do Peso cost averaging on a pooled fund who employ the professionals who will do the trading for you.
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