Crash course in shares
Don’t let scary headlines about market dives make you jumpy
IT has been a wild couple of weeks on global share markets. On some days a trading range of over 1000 points on the US market. It’s been a bit scary.
Starting in the US because of good economic news, the rout has reverberated around the world. Dire media coverage makes it unsettling for all share investors and those close to retirement. If you’re invested in shares how do you cope with volatile markets like we have at the moment?
DON’T PANIC
Stay calm. Get some sound advice from a stockbroker, financial planner or investment savvy friend or relative.
Never forget markets are simply a collection of people making investment decisions. Those people have the same human emotions as everyone. They make rash decisions, are gripped by fear of the unknown and have a herd mentality because they don’t want to stand out against the pack if they’re wrong.
That’s why sometimes markets can appear to be overly skittish when the reality doesn’t seem to justify rash decisions. How can markets crash on news of a strong US economy?
Understanding the emotion is just as important as getting a handle on the fundamentals.
DOUBLE CHECK YOUR SUPER FUND OPTIONS
Most superannuation funds offer investors a range of investment options from high risk international funds through to very conservative balanced and capital stable. Now is a good time to check which options you’re invested in and whether they reflect your risk profile.
If they look a bit risky, and over-exposed to shares in relation to your individual circumstances, chat with the fund about rebalancing.
While super fund returns will be hit by the share market downturn, remember it won’t be as bad because most fund managers have a diverse portfolio across property and fixed interest as well.
Those who are salary sacrificing into superannuation should continue as normal. Remember if you’re contributing the same amount each month, today’s contribution will buy more than last month’s. It’s the same effect as dollar-cost-averaging.
LOOK LONGER TERM
You are nervously watching share prices drop and your gains dwindle away. Is it time to bite the bullet, call a broker and sell out?
Don’t rush. Investors should be considering their share holdings in the light of longer term factors. Short-term falls in stock prices are part and parcel of investing in the share market.
Have a look at whether stocks across the board have been affected to the same extent. Often investors are spooked into selling at the very bottom of the market.
Look at history. Some of the best times to buy shares in the last 20 years have been the days immediately after a crash when everyone was still selling.
It is all about nerve and taking a long-term perspective. ASSESS THE FUNDAMENTALS OF EACH COMPANY
There are two things affecting the movement of share prices.
The first is the overall economic climate. Share prices are affected by interest rates, currency fluctuations, health of the economy and the general level of confidence.
Then there are individual factors affecting each stock; things like its cash flow, management, company history, competition and debt.
Whenever a share price falls, shareholders are best to go back and review these fundamentals.
The most important question to ask is whether this fall changes the overall view of the company? STAY COOL AND WATCH There are basically three choices for share investors … buy, sell or do nothing.
When times are volatile, you’re invested in quality companies and you’ve received good advice, the best decisions could be to just stay on the sidelines and watch. Observe until a trend becomes apparent. SHARE SHOCK WHAT CAUSED THE DOWNTURN
●Too much good news. The US economy is going gangbusters. This sparked a fear that inflation will rise and the US Federal Reserve may need to lift official interest rates.
● Computer trading fuels volatility – the sell triggers come quickly and they accentuate falls.
● The US share market rise went too far. American shares rose over 20 per cent last calendar year and 6 per cent just in January.
The golden rules of share investing
1. Do your homework … don’t buy or sell on rumour, hunch or impulse.
2. Balance the risk and reward … look at past performance and future prospects and if the worry of shares keeps you awake at night, don’t buy them.
3. Keep checking after you’ve bought … investment conditions, company management and objectives can change.
4. Be patient …don’t expect wealth overnight.
5. Don’t forget shares can bring income and capital appreciation.
6. Be alert to trends … try to put political, economic, scientific events through an investment filter.
7. Be prepared for unexpected events …. review promptly before acting.
8. Check the environment. Don’t buy just because the price looks cheap.
9. Take a loss quickly … don’t let pride prevent you from correcting a mistake.
10. Follow the market … don’t try to beat the trend.
11. Take a profit … it is better to make a little less profit by selling too soon than to take the greater risk of overstaying the market.