[Lee Jong-woo's Economic Reading] To the New Generation of Investors... "Remember That Stock Investment Is Not Your Main Job"

Annual Stock Returns Average 2%
Less Than One-Third of Bonds
Projected 20% Cumulative Over Next 5 Years
Avoid Expecting Very High Returns

There have been three instances in the past when individual investors participated in the market on a large scale. The first was from 1986 to 1989. The KOSPI started at 150 and rose to 1000, and since the rise lasted more than four years, the inflow was substantial. The second was right after the foreign exchange crisis in 1998. The stock price rose by 380% in just eight months, so the inflow speed was rapid. At the peak of the rise, money equivalent to 0.7% of the market capitalization flowed into equity funds daily; if converted to today's market capitalization, that amount corresponds to 14 trillion won. The third was during the one and a half years after 2006, when the China boom was at its peak. With that momentum, the KOSPI surpassed 2000 for the first time. In all three cases, a new generation was the main player. Older generations were more cautious about investing because they had experienced losses during market downturns, whereas the new generation did not have such fears.

Did the people who entered the stock market at those times make a lot of money? Let's assume that 30 years ago, in 1990, someone invested 10 million won in stocks, bonds, and apartments in the Seoul area. The money invested in stocks would now be about 26.22 million won. Since returns vary by stock, this calculation is based on the KOSPI, which combines multiple stocks. The result of investing in apartments in the Seoul area would be 41.7 million won, and if AA-rated corporate bonds were purchased, the result would be 92.12 million won. The stock return was only about one-third of the bond return, with an average annual return of 2%. This was largely due to the double-digit interest rates until the 1990s, but even in the past decade of low interest rates, stock performance was poor, yielding only about half the returns obtained through interest.

The late 1980s, when the first rise occurred, deserves special attention. The stock prices of insurance companies, investment finance firms, and securities companies rose nearly 100 times in three years, making all employees who held employee stock ownership plans wealthy. Recently, when SK Biopharm was listed, there were articles about employees making a lot of money from stocks, but such situations occurred widely across all secondary financial sectors at that time. The problem came afterward, as the stock price decline hit, and almost no one was able to secure profits.

What will happen going forward? Stocks are unlikely to be pushed down unilaterally as in the past 30 years, but it is also unlikely that very high returns will be achieved. Looking at five-year intervals, the average annual stock investment return is expected to be only slightly higher than the interest rate. Currently, corporate bond yields are in the high 2% range, so stock returns are expected to be in the mid-3% to 4% range, resulting in about a 20% cumulative return over five years. Since stock prices rose more than 70% after the outbreak of COVID-19, some may think "only 20% in five years" is low, but considering previous situations, this figure is not unreasonable. Five years ago, in October 2015, the KOSPI was around 1950 points. Now it is approaching 2400, which means a 22% increase over five years. Going back 10 years, the result is even more modest. In October 2010, the KOSPI was 1900. The cumulative return over 10 years was only 28%. Although the rapid rise in stock prices due to COVID-19 may give the impression that stocks and real estate will yield large profits, it is not an easy task.

The market has high expectations for individual investors, especially newly entering investors. In the past, individual investors entered the market after stock prices had risen significantly and acted as buyers absorbing sales from institutions and foreigners, but this time, it is expected that their learning ability will be superior to foreigners and institutions.

Whether the new generation of investors will change the market or not is another matter, but for these expectations to become reality, several conditions must be met. First, investing with borrowed money should be avoided. The media uses terms like "debt investment" (borrowing to invest in stocks) and "Yeongkkeul" (borrowing every possible resource to purchase housing) to describe the investment behavior of the 20s and 30s generation. Both involve gathering as much money as possible for investment, naturally including debt. The credit trading amount at securities firms, which was only 6 trillion won at the beginning of the year, once increased to 18 trillion won. Due to lower loan interest rates and the activation of mobile loans, credit loans at the five major commercial banks increased by more than 3 trillion won in September alone. Combining these means borrowing money from banks to engage in credit trading. Such investments can suffer enormous losses if stock prices fall by just 20%, due to margin calls. If money borrowed through bank credit loans results in investment losses, one must spend several years repaying the debt. Since normal living cannot be expected, this is not a matter to be judged from an investment perspective.

It is important to keep in mind that stock investment returns will not be high going forward. The stock price rise over the past six months was exceptional. Now, it is likely to return to the investment returns of the past 30 years. Ignoring this experience and chasing high returns can only lead to abnormal investments. After the futures and options market was introduced in Korea, the market size became the second largest in the world within a few years around 2000. This was because people who made high short-term profits during the IT bubble engaged in speculative futures trading after stock prices fell. The result was that most suffered large losses and left the futures and options market. Since domestic stock investment performance is not high, considering breakthroughs in overseas stocks such as the U.S. is also worth thinking about. So far, the U.S. market has been an alternative because it rose, but the story changes if stock prices fall. Even without going back to the 2000 IT bubble, a drop of more than 20% can happen anytime. Considering that the U.S. market has continued to rise for more than 11 years?the longest in history?and that the price-to-earnings ratio is the third highest ever, it is time to be cautious.

Finally, it is important to remember that stock investing is not one's main job. Living is sustained through each person's occupation. Immersing oneself in stock investment can interfere with one's main job. Mood changes daily with price fluctuations, making it difficult to concentrate on work. Proper investment methods, long-term investment, and selecting quality stocks are all secondary issues. The most important thing is to be faithful to one's main job and succeed there.

This content was produced with the assistance of AI translation services.