11% and 1%. Care to venture a guess as to what these numbers signify? 11% is the average yearly return of our local stock market index over the last 10 years. We call this index the Philippine Stock Exchange Index or just PSEI. And the 1%? Well, that’s the proportion of our population that have investments in our stock market. I’m actually exaggerating a bit; the real figure is even less than 1%. So, what does this mean? Basically, I think it means that over 99% of us are losing money every year when the solution could be simple: index! But what is this index I’m talking about? That’s what this article is all about.
First off, I feel like I need to mention that by no means are these returns guaranteed. In fact, the numbers vary. Over the last 5 years it’s been 4% per year and over the last 15 years it’s been 13%. While I must admit that these investments carry with them a certain amount of risk, I think having no investments at all is way riskier.
Back to our discussion. The Asian games just started recently and some of our best athletes are over there to compete. For basketball, we naturally didn’t send all of our active PBA players, right? As previously mentioned, only the best among them were selected to represent us, we all know and recognize that team as Gilas Pilipinas, PUSO! Now we can sort of think of the PSEI in the same way, that is, out of the 274 public companies we could invest in, the index is only comprised of the 30 biggest and most recognizable names among them. The PSEI is like our varsity team for public companies, PUSO! So, while Gilas Pilipinas boasts of players like James Yap, Chris Tiu and Paul Lee, the PSEI also has such bigshots as SM, Ayala, PLDT and Jollibee. Does any of them sound familiar? Well they should, we do business with these companies everyday in one way or another, whether we’re aware of it or not. This elite group of 30 that we call the index is our gauge of how well our local stock market is doing.
Next time you come across someone saying the market is up or down by x%, you’ll know that they probably meant the index. The same can also be said for other countries, they too have their own “national team” for stocks. In the US for example they have the Dow and S&P, Japan has the Nikkei while Hong Kong has the Hang Seng Index. Wherever there’s a stock market, there’s almost always an accompanying index to represent it.
There you have it, being exposed to the companies within the PSEI essentially means being business partners with the likes of Henry Sy, John Gokongwei and the Ayala’s. Most of us want that but unfortunately, we also share the preconceived notion that it’s very expensive or that the process is tedious when it really isn’t. A little thing called the Exchange Traded Fund or ETF is all we need to get started. Believe it or not, this ETF only costs about as much as one dinner date and then you’re well on your way to beat that ugly devil we call inflation. So, what’s an ETF and how does it work? Let’s leave those questions for your friendly neighborhood stockbroker to answer. Go ahead and call them, asking is free. I bet they’ll even appreciate you taking the time to talk to them. Those guys are lonely.
Disclaimer: We want to remind you, dear reader, that the content in this column is my opinion and AlphaEdge Research’s opinion only and should not be construed as investment advice because we’re not your financial adviser nor have we taken into consideration your personal objectives, financial situation, needs or circumstances as your fiduciary. This column is mainly for your entertainment and education only.