A volatile market is subject to various price changes and is often lacking in liquidity. Volatile markets cause many investors to worry and their investment portfolios often take a severe beating. Over the past 15 months, retirement plans have lost $2 trillion and the current federal budget is over $1 trillion. Due to the volatile market, banks are foreclosing on homes and companies are making several cutbacks to compensate for the lack of cash flow. Investors that poured money in equities have been hit the hardest. Equity portfolios have fallen 25% or more, while conservative portfolios have only fallen by about 10%.
During times of market volatility, investors tend to pass on investing money in stocks and instead opt to save their money or invest in CDs. Creditors have harsher restrictions on them and they are not able to approve a lot of people for credit during this time of economic hardship. Whenever the market is volatile, investors need to follow 3 standard rules:
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- Remember that preserving capital is greater than growth of capital.
- An investment portfolio needs to be diversified and include insurance, real estate, retirement plans, and other investments. There should always be a stable investment in the portfolio to optimize financial security if the market crashes.
- Keep focused on the long-term investments. While the market changes on a daily basis, patience is necessary during a volatile market if an investor wishes to survive the market.
While the market is volatile, the domestic economy is trying to rebound. Predictions of 4th quarter earnings have many investors hopeful about the future. During a volatile market, investors need to look at stocks and other investments that have growth potential.Here are some great places to invest during volatile times:
Always consider long-term investments. The success an individual investor can achieve in the stock market will come with the investor’s ability to remain patient and stay invested for a long time. Several investors are short-term investors and are hurt tremendously in a volatile market. When the market is up, short-term investments are not a bad idea, but when the market is volatile, it is better to buy stocks and stick with them for the long haul.
No one can predict the direction the market is going to take. It is impossible to state when the market will be up and when it will be down. Instead of waiting for good stocks to go lower, place your money into those stocks now. Long-term investors focus on the value of the individual shares rather than the day-to-day change in the market. When investors place money into the market during volatile times, they need to select investments that have a margin of safety.
The value of the share investors are buying is one of the most important factors to consider. Consider the debt-to-equity ratio, interest ratio, management quality, and break-up value of the share before investing. Some investors think that penny stocks are a great investment during volatile times. Penny stocks usually rise faster than the price of other shares, however if the market crashes again, investors are left with junk which has no value. Penny stocks can make investors money if they know what they are doing.
The best companies to invest in during volatile times are those that the investor knows and understands. Always study the facts of a company before investing in them. Some investors look at the products they use and decide to invest in those companies. For example, if you wear Nike shoes, take a look at the current stock levels for Nike and research a little more about the company. If you feel they are going to have a good recovery from the current market status, go ahead and buy a few shares. Companies that have good performance records will easily bounce back when the market starts to climb. Energy companies and staple companies are always worthwhile investments and during a volatile market, their stocks can be purchased for a great price.
The best thing an investor can do during a volatile market is to remain calm and avoid panicking. Too many investors worry about the financial problems facing the economy and the stock market crash and immediately sell their stock, often taking a loss. It is always a better idea to keep the current stocks you have and wait until the market starts to climb again before selling. Investors should be confident in their investment decisions and avoid watching CNBC and other channels that target the short-term investors. Whenever the market falls, investors have the perfect opportunity to purchase stocks they may have always wanted but couldn’t afford. Market volatility is a time to buy rather than to sell.
Weed out the stocks that aren’t performing and hang onto the successful ones. Stocks in companies like Microsoft, Google, and Apple will always bounce back once the economy starts to climb. Other stocks may have been high-risk ventures and haven’t won back the money that was initially invested are the stocks that need to be dropped from an investment portfolio.
Quite often investors act on tips from fellow investors and they invest their money into a company they do not fully understand. Never invest in a company that you know nothing about. It is important to find a business that has value to it. Several people select technology companies because their stocks are usually high-performers. While this is true, it is still important to understand which technology companies to invest it. If you know absolutely nothing about technology, it is probably not a good idea to invest in that sector.
One way to find out more about a company is to review their financial statements. Money can be made in the stock market by purchasing shares of companies you understand and by holding onto those stocks for a long-time. It is important to review the goals of each company and find out what their future plans are. If a company looks promising, go ahead and invest. If there is a change in the company, say new ownership or a new CEO, you need to review the company again and decide if the change will cause you to sell your stock. Always look at the performance of the company over the past year or longer. Some companies will react to market crashes and bounce right back, while others may follow a continuous pattern of decline. During a volatile market, it is important to reduce the amount of risk and focus on safe investments that will continue bringing positive results.
Always take a look at your risk-tolerance level in your investment portfolio. Maturity funds are great for aging investors since they decrease the amount of risk with their age. Every investment portfolio has an appreciation/depreciation area where investors go to balance their assets. During a volatile market, it is important to rebalance your assets and reduce your exposure to risk.
Smart investors understand that the economy can become shaky at any given time. Companies often have to make cut-backs to compensate for reduced sales. At any time, a sound investor could lose their job and they need to have something to fall back on. During a volatile market it is important to increase your cash reserves. The cash reserves need to cover about 12 to 18 months of household expenses to protect your family from unemployment or foreclosure. Investing in CDs or savings accounts is a great idea during a volatile market since they will continue earning interest and building a nice “nest egg” for you and your family. It is important to have cash reserves that can easily be accessed whenever they are needed. Some people even keep physical investments like gold coins in their home to help protect their family during an economic crisis. If you do not have a cash reserve, now is the time to start building one. Try to accumulate at least 6 months of gross pay into a savings account just in case you are one of the unfortunate Americans that becomes a victim of a company lay-off.
One area to consider reviewing during a volatile market is your current brokerage firm. There are always different investment approaches to use in the market, but if you feel like your broker is causing you to lose more money, it may be time to find a new firm. Some investors are listening to their brokers that are telling them to cut their losses and get out of the stock market before it drops any lower. Other brokers are telling their clients to remain patient as the market will make a turn and eventually begin rising. No matter what approach you decide to go with, make sure you have a broker that understands your needs and concerns. If you decide to meet with a new brokerage firm, carefully look over all their services and make sure they don’t have hidden fees.
Again, a volatile market is actually a great time for investors as they can pick up stocks for low prices. Always review the stock you select before you just hand your money over and you are stuck with a low performing stock.