February 21, 2020
Calibrating Cash to Stocks Ratio
We were recently asked, “When is the best time to invest in stocks?” The question goes deeper since the market has been lackluster since February 2018 and that there are major issues in the world such as the US and China trade war, US and Iran conflict, Hong Kong protests and the outbreak of the COVID-19 virus from Wuhan, China. The latter alone is expected to cut global GDP growth this year since China is the world’s biggest manufacturer of goods. It likewise threatens the health and lives of billions of people.
We would like to ask you to check your pictures from five years ago back in 2015 and see what you’ve been doing and where you’ve gone to? We’re sure it was generally a better time than now. Now, you have doubts of travelling or even going to the nearest mall because of COVID-19. 2015 was also the year before the PSEi ran to new highs to 8,000 in 2016 and 9,000 in January 2018. That was a good stretch for gains from share price appreciation, a benefit that we don’t have in the last two years.
So when is the best time to invest in stocks? Of course, it’s all the time. Among our tools is the cash to stocks ratio. It is just a ratio of what percentage of cash and stocks you hold. Right now, it is leaning close to minimal cash and majority stocks. The PSEi in our other tool, the PSEi Bands, is right there at the bottom of the bands where the market is oversold and ripe to pick up for medium to long term share price appreciation. In addition, the cash dividend yields now are so favorable you can make a portfolio generating near 5% yield.
Do you know that investing now suits the 4% Rule wherein your principal investment generates 4% yield every year for your financial security in your lifetime? I know this is a very general explanation, and you can look up how the 4% rule works. Many bash it, but we’re part of the group that believes in it. There’s even a community of frugal savers and investors in the US that live by it led by Mr. Money Moustache. They live modest, simple and happy lives that we aspire to.
The thing is that our tools are running optimally… on Normal Conditions. The thing is that times now are as extraordinary as in the Asian financial crisis of 1997 to 1998, the dot-com bubble aftermath and SARS outbreak of 2002 to 2003 and the global subprime crisis of 2008 to 2009. You can check out our previous article on Philippine stock market cycles by scrolling down below. This year may even be worse because COVID-19, which has now spread globally, puts health and lives directly at risk.
Back in February 3 to 6, we let our lone Stocks Research Service client PNB Securities know about Rock Bottom PSEi levels during the three periods mentioned earlier. These are the times the PSEi fell below normal conditions and at what level they fell to in our bands. They were really low. This prompts us to calibrate our cash to stocks ratio for today’s extraordinary situation. We will be doing this for the first time as we only started in 2009.
The PSEi, however, has hung just above our depressed low level. Maybe it is just buoyed by 2020 cash dividend season and may collapse later on in June. Since part of our Mission is minimizing risks, we are calibrating our cash to stocks ratio to 30% from nearly 0%. This added liquidity can be a buffer used to pick up stocks in case the PSEi falls to rock bottom levels this year. The effect of all the major issues mentioned earlier will be seen in 2H20. Right now, the market is basking in 4Q19 and 2019 results which are stronger.
Updates on Our Philippine Stocks Research Service for Individual Investors
We announced in our Twitter and Facebook accounts that this service we are currently building has evolved from an app to a community. This is a better platform since it is more personal and allows communication between us and clients. Our Mission is to Seek Value and to Minimize Risks in the Philippine Stock Market. Please let us know your suggestions for the service using the contact us box/email below in the Stocks Research Service Page. Target launch is March 2020.
Our service, based on the value-investing methodology, has been running for more than a decade. We specialize in the analysis, projections and valuations of stocks and stock markets.
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