Even those who have no interest in financial matters have probably noticed the increase in coverage about stock prices dropping everywhere in the past six to seven weeks. In some countries, the crisis has been going on for much longer.
This makes those who have always been interested in investing in stocks even more queasy about the thought, most of them dismissing the idea altogether.
Has the crisis reached a point where stocks are not worth it anymore?
The Herd Mentality
Even the most seasoned of investors have started feeling the pressure, considering how volatile the markets have been these past couple of months. And with everything that has been going on, majority of the investors in the market has succumbed to one huge threat – herd behaviour.
In the US market alone, it is seen that in 2014, retail investors own almost 23% of the high yield sector. These retail investors are often easily spooked and act based on emotions as compared to large institutions that rely on market trends.
Because of this, there is a huge likelihood of these retail investors selling their stocks when the waters are wavier than usual. With people selling when their investments are most needed, the entire market is affected by the shift.
Investors also find that they are less liquid during periods that they need more liquidity because they end up selling their assets when the market is not doing very well. Because of this, you see very few buyers when a sharp market decline is seen.
Buy Low, Sell High
But then, the current situation actually works for the more hardened investors – those who are not as easily swayed by the dips they are seeing. In fact, this is the perfect moment for them to put into practice one of the oldest tricks in the book – to buy low and sell high.
Of course, this is not as easy as it looks. Otherwise, everybody else would have been doing it, and you’ll see millionaires walking out of the stock market every day.
Using the buy low, sell high concept means having the stomach to invest in companies that look like they’re at the edge of demise, as characterized by those threatening red marks. It also means having the good sense to let go of a good thing once those green marks start appearing, something that a lot of people usually struggle with. Why sell something that’s earning, right?
And this is precisely why the buy low, sell high technique is not for everyone.
Also, different people have their own perspective of what ‘high’ or ‘low’ really means. Some look at current rates and prices and check on how much they have. Other are more scientific and look at it based on longer and wider trends.
In other words, some may start selling even if other still believe that the market is at a low point, thinking that they are following this rule to a T, and vice versa.
Is It Still Safe?
So is it still safe to assume that stock markets are still worth the investment?
I really think so.
History has proven time and again that quality stocks will always reap bigger rewards as compared to other investment opportunities. And don’t even get me started on saving your money in the bank instead. Yes, you get to ‘save’, but it is not an investment because the money does not grow.
Bank interest rates? They hardly matter. This is because the rate at which your money grows is so small, that when you compare it with running inflation rates, your money could actually end up losing its value instead of gaining more.
In other words, the cost of living continues to rise every year at rates that could be bigger than the amount of interest your money is earning in banks.
Don’t get me wrong, it’s great to have some savings tucked safely inside a bank account. But if you want real growth, stocks are still a smart choice despite the huge market drops.
Remember that people are selling their stocks like crazy, at prices that are unbelievably low. This means that no matter how fearful you may be, it will always be worth the jump. Because once those companies start recovering, you’ll be the first one reaping all the benefits while those who sold theirs weep with regret.
Here are a few tips that could help you strengthen your resolve and start investing in the stock market just when everybody else is running towards the opposite direction.
This is the perfect time for you to become objective – when others are being emotional.
People are selling their stocks because they fear they will lose everything. Fight the urge to act the same way.
In October 19, 1987, now referred to as Black Monday, the global stock market crashed. Dow Jones experienced a 22% loss in a single day.
You know what’s interesting about this? There was nothing notable that happened during the day that could have caused the crash. Nothing of great importance on the days preceding it either. The simple explanation?
A mass panic ensued. People feared the market would crash around them. And it did because everyone sold their stocks.
Don’t be part of the herd. Buy now while everybody else is banking on their emotions and be part of the huge recovery that comes after this storm. And yes, the market prices rose by 12% in 1988, and then another 27% in 1989.
If you’re expecting to get rich in a few months, then the stock market is not for you.
Long-term investments are great investments because of one thing – it saves you from the effects of short-term volatility.
You notice this with common commodities. Prices drop a few pesos, then rise a few more. This happens over a long period. And for those who are looking at it on a short-term basis, they would only see the money they lost within a small period of time.
But if you look at a longer trend, you would be able to see that as prices drop and rise, your portfolio drops and rises as well. And when it comes to quality stocks, regardless of the big percentage drops over a short period, there are even bigger gains if you accumulate the small steps it takes to recover.
It’s all about having enough patience to accumulate those small gains so that you overtake the losses incurred because of the drops.
Never put all your eggs in one basket.
It is never wise to invest all your money on just one or two big companies. Sure, they may be the most logical bet for now. But times change, and what was once huge may eventually drop. This means that if your only investment drops, you lose everything.
Buy different shares from different companies, and across different industries. This way, you have different investments rising even if some of them are falling. It’s all about proper timing and having a healthy mix of different industries and sectors.
All investments are risky. When you put money into something, you open yourself up to the possibility of loss.
But if you don’t take the leap, then you’re not going to get anywhere. And at a time when everybody else is running scared, now is the best time to stand out and go against the flow. Because you see regular people making the same decisions everyone else is making every single day, but it’s those precious few that does the unthinkable that manages to stand out make all the difference.
Special thanks to Allan Ajifo for the main image.