The Philippine stock market is the best investment you can ever make, especially over the long-term! There are other investment options, but they can’t even compare to the potential stocks can be as a high-yield investment.
Okay, that’s not really 100% true. There are a few cases where investing in the stock market is a bad idea. As they say, there is always an exception!
Depending on how you play your cards, where you live and on your current situation, other investments like starting your own business, real estate or REITs could be better than stocks.
I should also note that even though the examples are for the Philippine Stock Exchange, these reasons can easily apply to any stock market.
In this article, we’re going to talk about the reasons why the stock market could be your best investment. Then, our next article will be about the few reasons where you should avoid the stock market and probably pick some other investment. Don’t worry though, as that article will also include recommendation on which investments to pick besides the stock market!
So, here are the reasons why the Philippine Stock Exchange (PSE) is the best.
Reason #1: Historically, Stock Markets Have Extremely High Gains
As an investor, you definitely want to make sure that your investments make the most money that it can. One condition to determine the best investment is by looking at the different annual average Rate of Return (RoR) for each investment.
The RoR, or “return”, is how much you’ll get relative to your investment. An investment of P100,000 with an annual RoR of 10%, for example, will produce about P10,000 per year.
The historical average annual return of the Philippine Stock Exchange (PSE) is around 15%.
Note that that is the average, which includes the terrible stocks. If you can pick and choose only the best stocks, you can maybe get a higher RoR. However, for the sake of comparison, let’s just use the average of 15%.
Let’s compare that to other possible investments you can make. (There is a summary in the image below for easier reading.)
These returns will vary depending on multiple factors, but usually:
- For the 10-year Philippine government bonds, the highest rate is at about 12% over the last 10 years, but this return is still subject to a final tax rate of 20%. So, the net returns are actually at 9.6% at the highest, after subtracting the 20%! Since these rates change, on average though, the government bonds will probably only provide you a gain of 6.5% (already net of the 20% tax).
- For the Treasury Bills, the highest rate for the 1-year T-Bills over the last 8 years appear to be at 6.2%, or 5% after the 20% final tax.
- Over the last 5 years, the highest annual RoR for bond funds that I can find is only at about 2.5%.
- Returns on time deposits change as well, and vary depending on how much you deposit and for how long. It’s different for each bank but the highest we can find is that for deposits under P100,000, you can expect a net return of about 1.4%, and deposits above P100,000 can usually get a net return of about 2.8%.
- I can’t even call these investments because of the ridiculously low RoR, but you do have the option to just keep your money at the bank using a savings account. The highest interest for savings account that I can find is about 1.56% only, or about 1.25% after taxes.
- Investors that I talked to say their real estate investments usually net them about 5% to 12% depending on location, time of buying the property and a few other variables.
As you can see, the stock market has the highest possible returns compared to the other investment options we listed. Of course, it can be argued that the stock market is probably also the riskiest investment above.
However, the stock market is only risky if you don’t know what you’re doing. There are guidelines on how to make the stock market virtually risk free for your overall long-term investments.
We talk about risks in reason #2 below, but we’ll also make a future detailed guide about making sure you’re investing with very little risk, so stay tuned!
Our highest return on the stock market is when we invested in San Miguel Food and Beverage, where our average annual return was about 70%! Like I said, if you pick good stocks, you’ll probably get better gains.
If you’re a beginner investor, you should only expect an average RoR of about 10% to 12% when you invest in the stock market, instead of the average 15%. Though this is still higher compared to other investments you can make!
Reason #2: Low Risk Over the Long Term
Yes, people do lose money when the stock markets crash, but that’s usually because they let their emotions take over and they sell their investments during a market crash or a market downturn! They should’ve stayed invested and waited for the market to recover and increase again.
The stock market is very much like a roller coaster as described above.
The biggest stock market crash most of us has seen happened was during the financial crisis of 2007 – 2008. Before the crash, the PSE was at around 3,500 which was its highest level during October 2007.
When PSE crashed, it went to as low as 1,870 during February 2009! But then it went back to 3,500 during August 2010. It only took about 2+ years to ride out the crash.
Now, after a decade, the PSEi is around 8,000! That’s a LOT higher than what it was during the crash of 2007 – 2008.
If you sold your shares during the crash, you most definitely lost money. If you kept your investments, then you would’ve made more than double in gains right now!
So, what does this tell us? The stock market is safe as long as you keep invested over the long term. Even when crashes happen, you can recover your losses and even get actual gains as long as you wait. Patience is the key to investing.
This also tells us that the stock market always goes up over the long-term, basically guaranteeing gains. The ups and downs are merely temporary.
Don’t believe me? Here are charts of stock markets of different countries. (source: https://tradingeconomics.com/)
Notice that in these charts, the stock markets begin at a very low level, but over the decades, it has increased in an to incredibly high levels.
There are still some risks though. These risks include abrupt bankruptcies or large fraud being committed by higher management.
If you follow our guide in choosing stocks, these risks can be minimized. We will be posting more guides in the future, so please look forward to it. To make sure you don’t miss a post follow us on Facebook or Twitter, and maybe even join our mailing list.
Reason #3: Low Tax and Low Brokerage Costs
There are fees and taxes that you need to pay when you invest, but stock market fees will be less compared to fees of other passive investments.
Using our broker as an example, there is 0.25% for commissions plus 12% of that for VAT. There is also a PSE Trans Free of 0.005% and a Securities Clearing Corporation of The Philippines Fee of .01%. If you are selling a stock, there is an additional 0.6% sales tax that you need to pay.
(All these fees and taxes are automatically deducted by your broker when you make transactions, so do not worry about computing and paying them yourself!)
To make it clearer, let’s put this into perspective. At the middle of 2019, I sold shares for a gross amount of P103,410. So, how much did I pay in fees and taxes?
The commission and VAT were P258.52, the other fees were P15.51 and the sales tax was only P620.48.
All in all, I only paid P894.51 for a P100,000 sale transaction! There were buying costs when I bought the stock before I sold them, and it was only about P90.
If I invested P100,000 on a 10-year bond and got interest for the year, the 20% final tax alone would cost me about P1,600, not including any processing fees yet. That’s way more expensive!
Reason #4: Very Cheap To Get Started And Easy To Do
Unlike other investments that require at least P50,000 or up to a few millions to start, you can begin investing on the stock market for as low as P5,000 only.
You can then add any amount to your investments at any time.
It’s also really easy to buy and sell stocks when you already have a broker account. It’s usually only just a few clicks on their website.
Choosing which stocks to invest in is also easy now. While there are almost 300 stocks to choose from in the Philippine stock market, there are steps you can take to reduce that to the top 3 or top 5 that you can invest into, especially with the help of your broker’s reports and guides.
We’ll also post guides about how to easily pick winner stocks that can give you good returns. So, as I have already written many times, follow us on Facebook or Twitter, and maybe even join our mailing list.
Reason #5: Gain in 2 Ways
If you are an owner of a stock of a company, you gain money in 2 ways.
The first way of earning is through dividends.
Dividends are your shares in the profit of the company. Usually, when a company earns money, they will most likely use a big chunk of it for their expenses and expansion for next year, but a small portion of the profits will be distributed to the owners, meaning you!
They are usually minimal in amount but if you add up all the dividends you receive every year and invest it, it can still contribute to a few millions in total after a couple of decades of investing.
For 2019, I received about P10,800 in dividends. If the dividends I receive increase by 5% per year and I re-invest it in the stock market, after 25 years I would get P2,352,449! That’s just the dividends being re-invested, and not including the money I actually put into the stock market!
The other way is to earn money is to sell the stocks at a higher price than you paid for it. This is where the bulk of your gains will be from.
I’ve already mentioned above that realistically, you can expect about 10% – 12% gain in the stock market over the long term. This is the profit you will get from buying a stock, holding onto it, and selling it in the future.
This is actually really great, and we have already determined that it is the highest compared to the other investments mentioned in Reason #1 above.
Essentially, over the short term, you will be getting dividends. And over the long-term, you will be getting larger gains from selling your stocks at higher prices.
Reason #6: There is No Lock-In Period
Some investments will require you to keep invested for a certain number of years. This is not the case for stocks.
You can sell your stocks a minute after you bought them, if you want to. You can also withdraw the money anytime (though newly sold stocks will need about 3 days to process before you can withdraw the cash, most of the time).
Hopefully though, you won’t have to sell your stocks immediately. To make sure you are handling your finances and investments properly, please read our blog on the 7 Easy Steps For Financial Freedom And Wealth.
And That's Why we like investing in the PSE
Honestly, if reason #1 and #2 doesn’t convince you, I don’t know what will! Does this mean you should ABSOLUTELY invest in the stock market and ONLY the stock market? Definitely not!
As we mentioned at the beginning of this blog, there are very legitimate reasons as to why you should NOT invest in the stock market. We will be posting those reasons very soon!
Also, if you invest in the stock market, that still doesn’t mean that you should just put all your money there and nowhere else. Splitting your investments into stocks and bonds, for example, is a legitimate investment strategy as well. This is called diversification and we will make another post for it in the future as well!
Good luck, and I hope you learned something!
Which reason do you like the best? Or which one convinced you to consider investing in the Philippine Stock Market? Comment below!