Yahoo Finance What wise investors do in a volatile stock market
Stock markets have moved wildly in the last few months as geopolitical tensions and viral outbreaks spook investors.
In such an environment, experts are urging investors to hang tight and take advantage of the rises and falls.
“A lot of people are quite scared by market volatility, but if you’ve got a really long time horizon … volatility or downturns can present great opportunities for investors,” Fox & Hare financial adviser Jessica Brady told Yahoo Finance.
The most recent stock market slumps have been driven by anxieties around the coronavirus Covid-19, with the Bank of America predicting that 2020 would be the worst year for the global economy since 2009.
But outbreaks like coronavirus aren’t as out of the ordinary as some might believe, Brady said.
“This isn’t the first time we’ve seen something like this in terms of pandemics, and markets have responded in a volatile way.”
However, investors these days have immediate, digital access to their portfolios and are making rapid decisions on their investments.
During the global financial crisis, investors who didn’t stick it out ended up making major losses. “To be honest, if they had just stayed in the market, a lot of them would have recovered. But instead, they accepted a large loss.”
Brady’s top tips for investing
1. Don’t put your eggs in one basket
Brady recommends index investing for her clients, which means tracking a benchmark index – such as the ASX200 or the NASDAQ – rather than picking individual stocks. Indices can cover stocks or other asset types, like cash, bonds, or commodities.
“What we look for is diversified index funds to really spread the risk, spread the opportunity.
“You really want to make sure you’re getting exposure across more than one type of asset.”
2. Invest according to how quickly you want to make money
Brady recommends adjusting your investment approach according to your ‘time horizon’, that is, how long you want to invest your money for. Her general rule of thumb is: the shorter the time horizon, the less risk you can accept.
So, for instance, if you have money in a bank account that you want to invest in order to buy a property next year, you wouldn’t be looking at putting your money in a highly volatile market.
But if you wanted to buy a property in five years’ time, you would be able to accept a higher level of risk.
“There are a lot of different investment options that carry different risk/return characteristics. That could be a conservative portfolio all the way up to a high growth portfolio.
“They have really different risk levels and they have really different return characteristics.”
3. Keep calm and carry on
Brady’s last piece of advice is to keep your cool when markets seem to go belly-up.
Quoting the world’s most famous investor, Warren Buffett, Brady said: “The stock market is designed to transfer money from the active to the patient.”
In other words, it pays to be forbearing, even though it might be tempting to pull your money out of something that looks like it’s doing terribly.
“For those people who are patient and ride it out, or continue to invest in line with their regular investment plan, I think that that’s a very, very wise piece of advice.”
Jessica Brady will be speaking at Yahoo Finance’s Women’s Money Movement Breakfast Club on Wednesday, 18 March in Sydney and will be providing tips to women on how to get started on investing. Buy tickets to the event here.
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