There is no debate on how volatile this stock market has been in the past twelve months. The extremes it has experienced are unprecedented despite of improved economy matrix and indicators. There are many factors that are bringing this volatility of stock market, tariff, politics, international trade conflicts etc. Market reacts to certain policy change differently and is desperately looking for signs to indicate a clear direction, therefore, volatility.
Below is the top 20 most gains and loses in stock market history. 2018 and 2019 (despite we are not even half into the year yet) are making the history at the same level as 2008 market crash.
The move in stock market has triggered many investors to fear of bear market and doubt on the investment positions. The emotions around the ups and downs in the market are very common and understandable. Investment was made with one thing in mind, make money and stay profitable. When there are signs that might go against this very perspective and expectation, fear start crawling into emotion mix.
Why do you fear?
Fear is the nature response to investment performance when it does not go in a way you expected. It is a mechanism in mind that kicks in automatically to protect original intention of making investment, which is to generate returns, despite that we know logically risk is always involved. Since it is natural and spontaneous, it is acceptable and common. The problem is that fear can cloud your judgement that creates behaviors against your logic.
As we make investments in stock market, we knew there would be risks, which are the reason we would expect returns. During good times, we see the appreciation of investment and all decisions of buy or sell are logical and easier, but a time like today’s market will question investors, can you still hold onto your theory and logic in making decisions, or you will let fear take over and control of your reaction to the market? Answer is simple, we need to stay rational and not let emotion take over, but how?
How to overcome the fear in investment?
Overcoming the fear in investment is like overcoming emotion in any other circumstances. Take driving as an example, you know there might be bad drivers out there you have to watch out, but you accept that fact and feel confident in managing it through, so fear does not win over your mind and stop you from driving.
The same applies to the investment. You know there will be risk when investment was made. The best decision would be an educated decision with logic rather than emotional. You did all the homework and trusted fundamentals of a company before making investment. Suddenly some news or statements came in to distract the path, worse of all, sometimes those statements or news don’t even have a direct impact to the companies you are investing. There are a few steps you can take to overcome this frustration:
Recognize and accept the fact that risks do exist. Knowing at the very beginning that managing risk is a significant part of investment strategy. It is a certain factor coexisting with market. To know and anticipate its very certainty will give you the calmness needed to keep you on track to making sense to investments.
Invest in what you are familiar with is the best way of offsetting fears. Fear is partially resulted from not knowing what will happen, or not confident in knowing. The more you are familiar with what you invest, the better you can judge on the impact from other circumstance changes to drive a good decision.
Understand the industry and products. Knowing where the company is going to and what advantages it has against its competitors in terms of product offered. Product, marketing and sales are three key pillars in any company, but product is the base of all three. The product has to be demanded and inexpensive to leave room for margins, which drive the return to your investment.
study the company for competitive analysis
Is the company a follower or innovator, or both (some products follow and some products drive the market trend)? Is the company capturing the share without hurting the bottom line margins? What are competitors doing?
Understand the general direction gives you the opportunity to remain logical for changes.
pay more attention to company outlook than today’s financials
Understanding the past is necessary to know how product has generated earnings and what is the key driver of the company growth. This does not mean the company has to already been very successful in earnings and dividends. You are looking for a growth opportunity, so the future looking perspective is the focus of the research.
Balance your portfolio. I don’t believe average people have enough money to invest in all sorts of investment tools and don’t recommend that either. However, to have a few stocks in different industries is a must to lower risk and uncertainty. Some companies themselves are diversified as well if they invest into different fields and areas. Keep portfolio manageable, meaning don’t invest every single stock, but pick the ones that you have capacity to look into and do the homework.
Invest over time: have a regular investment made and added to your portfolio. Investing for the long term reduces investment risk. Although it is normal to have fluctuation of prices in the market, in general market gains back and make profit over long term. The pick of the great foundation of companies is very important and rest will play out over time. The tolerance of short-term price fluctuations often generates greater long-term rewards for stocks versus other asset classes. Stocks fluctuate in value more than CDs but over the long term, stocks, on average, consistently and substantially outperform cash and the thief of cash: inflation.
Return on investment is a factor of risk. The risk provides us with investment returns. If you don’t accept risk of investment, you are accepting the certainty of losing your saving value and not being able to grow your wealth, which raise risk of not being able to retire, or get to financial freedom.
Educate yourself, know why you are investing to certain companies (and want to own a piece of them), understand the growth driver and competitors. The more you know, the better judgement you make and confidence you build. Fear will be gradually replaced by factual based the best estimate, or logical decisions.
Simple Wealth For Women is a blogging website focusing on financial discussions. I help women to crush debt, learn how to invest and make more money. I show you simple approach and provide you with specific ideas to help you get to financial freedom and build an amazing life.