It’s very difficult to find a ray of hope amidst the current pandemonium, when the world economy has encountered perhaps its worst crisis after world war two. The major capital markets across the globe in the past two months have taken a beating like never before. So, amidst all this chaos, what should an investor do? What would be the best course of action he might take to protect his investments and how should he position himself to be in the most advantageous position when the recovery starts. Today we are going to discuss five tips and strategies that can be considered useful for the investors while trading in these choppy waters.
- Stay calm, do not panic –Stock markets crash and then recover; this is their very nature and has been witnessed since they first came into being. This time also in all probability, it would not be an exception. If an investor is holding an investment for the long term, then this certainly is not a time to sell. It is difficult, however, to go against the tide, but past events in the stock markets would suggest people have created value by doing the same. Famous Wall Street investor and investment guru Warren Buffet in one of his investment tips to investors had said that one should be afraid when everyone is greedy, and one should be greedy when everyone is scared. This is one of those opportunities when that advise can be aptly implemented. There is no point selling in this market and booking a loss if you understand that both the company, whose shares you are holding, and the markets are going to bounce back and will be doing well in the future. In the current scenario, when the situation is sliding towards the worst day by day its best to wait and watch rather than go for panic selling.
- Pick value, not a bargain – Should an investor decide to venture in this market despite the depressive state of trading? There are certain things he must be mindful of; this market is definitely not for taking speculative positions. Given what the current situation is, traders and other market participants are increasingly likely to react more to bad news than to any good news, under these circumstances taking a short call on stocks is more likely to result in losses than turn out gains. In these times, looking at stocks in terms of bargain prices while being unmindful of the strengths of the underlying businesses could lead to a substantial loss. It should be remembered here that these times are particularly rough for weak companies, and they face a high probability of failure. Investors would do well if they keep this aspect in mind while looking for cheaply priced stocks. It is also worth noting here that quality businesses have a strong foundation and have a better chance of surviving turbulent times and are also the ones who would spring back first when better times return.
- Best time to build a long-term portfolio – This is the time when one should enter the market to buy stocks with long term gains in mind. As the sentiment levels will be on the lower side in the market where companies having high long-term potential be available for a discount. However, here the critical element to be mindful of is a long-term perspective. In the short run, these companies may not do well or factors not exclusive to the business performance of the companies but for factors that may be affecting the markets at large. It might happen that such stocks could slide from their current position and make the investor feel uneasy, but if he has invested in the long term in mind, these temporary losses will not deter him from changing his position. Long term investing generally even out short-term market volatility risks, and directly pegs the investment value creation of the investor to the business performance of the company. Also, it should be kept in mind that there is usually less downside risk in these market conditions and the chances of prices sliding down are comparatively less compared to prices going up, as compared to the situation when markets are on the peak and the downside risk is more.
- Best possible opportunity to build an earnings portfolio – An earnings portfolio is a portfolio of stocks where the primary objective of the investor is to earn through dividend income rather than capital gains. A good earnings portfolio is one that gives the investor a high yield of return. Good return giving companies are generally expensively priced in normal market conditions making their yields low, but in conditions like these, the prices drop significantly, making these stocks cheaply available for investors looking to invest in them. It may so happen that these companies may not give the same rate of dividends that they usually give in normal times during this period, but when the situation returns to normal, these companies will be back to their historical rates of dividend giving the investor a very high-income yield. Such opportunities do come, but very rarely, when an investor gets to build such a portfolio. However, it is very important that the investor should put in meticulous research and is extremely careful trading in this market, but if he can do that the results can be highly rewarding. Such portfolios offer low risk and moderate return scenario to the investors and are meant for long term investing.
- Best time to pick up quality index funds – These kinds of turbulent time are also the best times to invest in funds, either actively managed or passively managed. In actively managed funds investors get the benefit of availing the services of a professional fund manager who would better deploy investors funds than investors could do themselves, given the current market conditions professional assistance will go a long way in protecting and creating value for the investor. On the other hand, passive index funds do not have active fund managers but must follow a popular stock index. These funds have the advantage that they peg the investors’ funds to the whole stock market and not to any particular stock. These funds offer very low risk and if purchased during such distressing times, offer good returns to the investor when better times return. Investing in funds is a viable option for investors who do not have the required time or adequate knowledge to do thorough stock market research and safety remains a much bigger concern for them than high stock market gains.
The state of the capital markets in the United Kingdom and continental Europe is not any different than what is happening in the rest of the world. The above-mentioned tips are general perceived possible ways to tap the opportunity, though the investors trading in any markets needs to go through proper analysis and should take the investment decisions based on his/her risk-taking appetite.
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