This year has been quite a roller coaster ride for many investors – 2016 started on a negative note as worries over China, rising rates by the Federal Reserve and a weak global economic outlook send jitters through the markets.
The recent Brexit hasn’t done much to help investors fight that negativity as well. Given that the market is as fickle as a fiddle, how do investors survive the volatility and still thrive in their investments?
The reason that we shouldn’t panic when markets take a nosedive is simple – markets are cyclical. Simply put, what goes up, must come down.
Markets go through periods of extreme highs and extreme lows but the general consensus is that if you are investing for the long term, most markets generally move on the uptrend.Bubbles and declining markets all form part of the cycle, so it is normal to witness periods where stock values are artificially elevated or devalued to way beyond their real worth.
If you can accept this characteristic about the markets, stick to your investment plan and keep your emotions aside, then you can thrive in volatile market conditions.
During these times, follow our three tips to keep your head cool:
1) Avoid Believing All You See In The Media
Whichever way the market goes, financial media and analysts will have to say something about the market. That’s part of their job.
When markets decline, a sense of foreboding may rise among the doom-sayers, often quoting semblance to the last market crash.
When stock prices head north, a bubble is imminent. Thus, it is best to rely on your own judgment and take what you see in the media with a grain of salt.
2) Take Advantage Of Dollar Cost Averaging (DCA)
A common and time-tested investment strategy is the concept of Dollar Cost Averaging or DCA. DCA refers to a strategy where an investor invests a fixed amount of money over a certain time over a regular interval.
By doing this, the cost of the investment will be lower over time since you will buy more when the price of the asset goes down and buy less when it becomes more expensive.Let us illustrate this concept with an example.
Frankie decides to invest $500 every month over a period of 6 months into a stock that was trading at $5 dollar in the first month.
|Amount||Time Period||Price of Stock||Units Purchased|
From the above example, you would notice that with $3,000, an investor would be able to buy 651.9 units of the stock at the average price of $4.66.
Considering the current price of $5.50, the $3,000 investment would have resulted in a profit of $547.60
If an investor were to invest that $3,000 in January, he would have bought 600 shares at $5 each and earned a return of $300 at the end of June.
The returns are significantly lower at 10% compared to the 18.3% returns using DCA.
3) Go Bargain-Hunting
Share prices of companies with good fundamentals are seldom spared when the overall market isn’t doing well. This is a good time for investors to seek out these companies so that they can get their shares at an undervalued price.
While panicky investors go towards selling mode when markets are in the doldrums, the smart ones get in so that they do not miss out on the ensuing rally.
This is especially true when the market volatility is event-driven. Most of the time, investors sell on the initial bad news but you can usually expect a bounce soon after the panic is over.