Up the Gains was founded to help friends and family achieve financial security.
1. Always have a plan
2. Don't try and time the market
3. Do your research
Market volatility is part and parcel of being an investor. There are periods where the markets experience huge levels of volatility and this can be very scary, even for the more seasoned investor.
Volatile markets can be characterised by rapid price fluctuations alongside heavy trading volumes.
Often investors can become spooked during downturns and forget why they made an investment in the first place. This is especially true for novices who aren't used to seeing their portfolios drop.
The important thing to note is that it's normal, in fact, it's completely inevitable so understanding this early on will help you in the long run.
To shield your portfolio there are some key steps you can take to protect yourself in the tougher times. The markets have dropped more than 20% countless times since the 1950s. If you had held on during that time £10,000 investing in 1950 would now be worth £380,000.
Success in life often comes when you've developed a plan. The most successful investors have planned ahead to achieve consistent growth over time.
It's important to establish what kind of investor you are before investing. You can do this by establishing a timeframe, your available capital or income, risk tolerance and savings goal. Be realistic when looking at your short-term and long-term targets. Once you've put these together you'll have a clear understanding of what kind of investments you want to make.
Investing with your emotions can be damaging to your returns. By having a set plan you can make sound investment decisions based on reasoning. Once you made these decisions you're less likely to chase a quick buck from a tip or hot trend.
If you lack the knowledge or are worried about the decisions you're making, then there are hundreds of articles available online that can help you. If you're still stuck, then consider hiring a professional financial planner. In the long run, the fees you could pay a professional could well be worth it if you're consistently making bad decisions on your own.
2. Time in the market not timing the market
There have been 100s of studies over the years showcasing the importance of staying invested in times of volatility. For long-term investors, those who have sold their investments and rebought are often outperformed by those who stayed the course.
There's yet to be someone who can predict the future price of a stock. This doesn't stop people from trying though. There are 1000s of articles, research papers, videos and social media posts released every day trying to predict the stock market. Most of them are often wrong.
Market timing means you're buying something that you believe will generate faster returns in the short term. Investors are essentially trying to outsmart the market, which unfortunately for them is harder than they think.
Understandably this is a popular outlook, especially for beginners glamourised by the buy low sell high thesis. Whilst that's exactly what you want to be doing, in the short term it requires immense luck to be on your side. It might pay off once and that's where individuals get sucked in. The challenge is to keep doing it over many years.
Trying to time your investment purchases also has adverse effects on your emotions, it can result in you making quick decisions that are based on fear and not facts.
Time in the market is different. Investors have a longer time horizon, a rigid plan and buy-in no matter the price. You're then relying on the fundamentals or earnings of your investments and not trying to beat the market in the short term. This only changes when the original reason you bought security changes or you reach your end goal.
"Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves."
— Peter Lynch
3. Do your research
If you're picking your own investments and not working with a professional then it's hugely important to do your own research.
There are some key factors to look out for including growth, competition, product lines, management teams, current stock price vs historic stock price and debt levels. Utilise the internet to find articles and research pieces that give you a wider picture of what the company is up to. There are also stock screeners and analysts giving you a company's full financial picture in a matter of clicks.
At the end of the day if you don't do your research you're relying on luck to succeed. When you're playing with your hard-earned cash is that something you want to be doing?
Human behaviour can determine the stock price in the short term. Securities can fall out of favour for no reason at all which creates what investors call a buying opportunity. Savvy investors take advantage of these opportunities using what's called a margin of safety.
The margin of safety is where the investor believes the current stock price is lower than its intrinsic value. This means that overtime should they be correct their returns should be greater than those who invested at the current price level.
An easy way to work this out would be £100 of intrinsic value vs a stock price of 80. This means if you entered the market at the current price then in the investors' eyes the margin of safety is 20%. In this situation, you could well be comfortable with the stock price going slightly lower as you feel it’s undervalued and would be willing to hold on.
Try not to dwell on the short term. The media exist to write stories that provide views and clicks. A headline predicting armageddon is always more likely to get more views than the ones saying that everything is rosy. If you stay on the sidelines and keep your eyes on the prize then most of the time you really have nothing to worry about!
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2022 Sammie Ellard-King