3 Investment Basics to help you face a Turbulent Market
There are disturbing times for many investors. It so happened in London that FTSE 100 index reached an all-time high of 7,104 and in the turmoil market of mid-January. It went as low as 5,640 which was a fall over 20%. Many investors clearly got worried and despite of the market’s recovery it still fell further. If you have put your pension in funds and trackers, and you’re planning to retire soon and buy an annuity, then the fall of 20% is real. All things being equal, you’ll buy 20% less annuity income than you got last April. Most of the investors don’t have to face the prospect of selling up so the temporary falls which are of an unknown duration are just like simple business.
Markets can go up and they may come down. The present market conditions give a lot of important lessons for investors. But, we do not follow any advice or lessons given by the well known investors and when our money is at stake, we follow our instincts rather than a well-given advice. Instincts can also lead to wealth destruction rather than wealth-building.
Here are 3 investment basics which can help you face a turbulent market.
1. Long term investment
You should be a long-term buy-and-hold minded investor. If you churn your investments you can get in and out of a given position without incurring much of a wealth-destroying capital loss. It is therefore more logical that you should take your time over selecting a stock. Pick up a decent business run by skilled managers and they will get on their job of building your wealth. This strategy works very well with Warren Buffet and like him, your investment horizon should be of decades and not days.
2. Buy when markets are cheap
It doesn’t mean that you should ignore market volatility. It should not be seen from the point of view of selling, but buying. Be greedy when others are fearful and be fearful when others are greedy. Try to buy when the markets are depressed and try to keep your hands away firmly when euphoria rules. It’s a long term strategy. You can afford to look on periods of low prices as opportunities and not threats.
3. Spread your risk
One should also learn the value of diversification. If we go back to the dotcom crash of 2000-2001 where investors loaded up on so-called New Economy stocks, and had to pay ridiculous prices for ridiculous businesses. At the present time, the investors are suffering because they have piled into high-flying stocks and mining stocks- some of which are down to 90%, or worse. In the 2007-2008 “credit crunch” and developing recession, investors had loaded on highly leveraged financial stocks with exposures to dodgy mortgage debts. So, try to spread your risks. A portfolio which is spread across multiple sectors will be tougher to adversity rather than a portfolio which is concentrated on just one or two sectors.
So, these are the three ways to face a turbulent market. But all these three ways require you to control your emotions which is very difficult to do than said. Try to follow these tips and I hope you invest best and proper.