News by AUN News correspondent
Sunday, July 17, 2022
You may have noticed recently that many investors seem to be fleeing the stock market. With rising global tensions, trade wars, and slowing economic growth, volatility and uncertainty have spiked. For some, the risks now appear to outweigh the rewards of staying invested in equities. However, not all investors are running for the exits. Some see opportunity in the turmoil and are doubling down, increasing their stock market exposure to capitalise on lower prices and position themselves for the inevitable recovery and next bull market. As an investor yourself, determining which camp you fall into and the appropriate strategy for your situation has become increasingly complex yet critically important. This article will explore the current state of the stock market, analyse the arguments for both fleeing and embracing risk at this time, and provide guidance to help determine the wisest course of action for your investment portfolio based on your financial goals and risk tolerance. The path forward is not obvious, but with an objective review of the facts, an understanding of historical market cycles, and a balanced long-term perspective, the right choice can come into clearer focus.
The Great Resignation: Why Investors Are Leaving the Stock Market
As an investor, you have likely contemplated leaving the stock market recently or know others who have. This “Great Resignation” of investors is due to several factors:
- Volatility and risk The stock market has experienced increased volatility and downturns in recent years, scaring off risk-averse investors. The COVID-19 pandemic caused major drops, and some fear another recession looms. For those nearing retirement, the risks may seem too great.
- Low returns. Interest rates on bonds and CDs have been low for over a decade. While the stock market has seen periods of solid returns, some investors struggle to find investments that meet their needs. They seek alternative ways to generate income.
- A desire for stability. Fluctuations in the stock market can be stressful and difficult to stomach. Some investors prefer stable investments with little change in principal to minimise anxiety and sleep better at night, even if returns are lower.
- A shift to new priorities. Priorities change, and some investors now value experiences over accumulating wealth. They may rather spend or donate funds than invest in stocks. Travelling, hobbies, and spending time with loved ones have become the new pursuits.
While the stock market remains risky, the potential for solid long-term returns still exists for those able to withstand short-term drops. However, for many investors seeking income, stability, or new life pursuits, alternative options like real estate, private lending, or a side business may prove appealing and help find the right balance of risk and reward. The choice depends on your financial situation, priorities, and appetite for risk.
Chasing Higher Returns: The Allure of Riskier Assets
As interest rates remain low and market volatility persists, some investors are embracing higher-risk assets in a bid for substantial returns.
- Chasing Yield: With savings accounts and CDs offering minimal interest, investors are turning to riskier fare like high-yield bonds, leveraged loans, and emerging market debt, hoping for richer payouts. However, these assets also amplify the chance of losses if economic conditions deteriorate.
- Venturing into Equities: While stocks historically outperform other assets, they also tend to be more volatile. Some investors are wading into equities for the first time or expanding their stock allocations. New investors should start slowly, focus on broadly diversified funds, and maintain a long-term perspective.
- Exploring Alternatives: Alternative investments like hedge funds, private equity, real estate, and cryptocurrencies are attracting interest due to the prospect of sizable gains. Yet these options can be complex, illiquid, and loosely regulated. They typically require large initial investments and lock-up periods, and returns are not guaranteed.
- Weighing the Risks: Before chasing higher returns, make sure you understand all the risks. Can you afford to lose money? Are you nearing retirement? How will losses impact your financial goals? Your risk tolerance depends on your unique situation and timeline. If volatility concerns you, stay diversified and keep some money in stable-value accounts.
With interest rates low for the foreseeable future, the desire to generate stronger returns is understandable. However, higher rewards always come with greater risks. As an investor, make sure any risks you take align with your financial objectives and risk tolerance. Stay diversified, do your research, and avoid chasing the latest fad. Your future self will thank you.
Meme Stocks and Cryptocurrency: When FOMO Goes Wrong
When FOMO Goes Wrong?
For some investors, the fear of missing out (FOMO) on the next hot opportunity leads to poor decision-making and substantial losses. Both meme stocks and cryptocurrencies have drawn interest from those susceptible to FOMO, despite the significant risks involved.
Meme stocks refer to shares of companies that gain popularity and experience volatile price surges, often unrelated to the company’s actual business or financial performance. These surges are driven by social media hype and FOMO. Investing in meme stocks is extremely speculative, as share prices can plummet just as quickly.
Cryptocurrencies like Bitcoin are digital assets with similarly volatile price swings and FOMO appeal. However, cryptocurrencies are not regulated or backed like government currencies. Your investment could drop substantially, even to zero, at any time due to security issues or other market forces.
Before investing in risky assets prone to FOMO, consider your financial situation and risk tolerance. Do you have money to spare? Are you investing for the long term? If the answer is no, avoid speculative investments where you could lose most or all of your capital.
For those able to stomach the volatility, limit FOMO positions to a small portion of your portfolio. And go in with a clear exit strategy, taking profits when you can to avoid being left holding the bag.
Risky assets may seem exciting, but FOMO is not an investment strategy. Do your own research, understand what you’re buying, and don’t be afraid to miss out; your financial security is more important. With hard work and discipline, you can build wealth over time through prudent investing in proven assets. Don’t gamble more than you can afford to lose chasing the next big thing.
The Contrarian View: Why Some Investors See Opportunity
While some investors are fleeing the stock market due to current volatility and risks, others see opportunity. For contrarian investors, market downturns can represent a chance to find undervalued stocks at a discount.
Bargain Hunting Potential
When the broader market declines, high-quality stocks are often sold off indiscriminately, causing their share prices to drop below their intrinsic value. Savvy investors can swoop in and buy these stocks at a bargain, positioning themselves for significant gains once the market recovers. Some of the best times to invest have been when uncertainty was high but the economy was still fundamentally sound.
For long-term investors, market downturns present a chance to lower the average cost of stocks through dollar-cost averaging. By investing money regularly, regardless of the share price, more shares are purchased when prices are low. This can result in a lower average cost over time and greater returns when share prices rebound. While risky, this “buy low” approach can pay off for those with patience and time horizons of at least 5–10 years.
Contrarian investors believe that the stock market will eventually recover and even reach new highs, as it has after every past downturn. They aim to buy solid, well-managed companies with promising growth prospects, believing their share prices will soar again when the business cycle improves and investor sentiment turns positive. The key is choosing companies with competitive advantages, loyal customers, and the ability to thrive even during market turmoil.
Of course, catching a falling knife is dangerous, and the risks remain elevated. However, for intrepid investors seeking maximum long-term rewards, a market exodus can represent the ideal time to invest in high-quality stocks at bargain prices, positioning themselves to benefit when the broader market inevitably recovers. With cautious optimism and careful selection, the contrarian view may prove most prescient.
FAQ: What Should Investors Do Now?
Stay Invested for the Long term
For long-term investors, the best strategy is to remain invested in the market. Historically, the stock market has always recovered from downturns and corrections and gone on to new highs. If you sell now, you risk locking in losses and missing out on the market’s eventual rebound and recovery.
- Focus on high-quality, dividend-paying stocks with stable balance sheets and
cash flows. Blue-chip companies in sectors like technology, healthcare, and consumer staples are good options.
- Dollar-cost average by continuing to invest money from each paycheck into the market. This allows you to buy more shares when prices are low and fewer shares when prices rise. Over time, this can lower your average cost per share.
- Review and rebalance your portfolio to make sure your asset allocation still aligns with your financial goals and risk tolerance. You may need to shift some money from stocks into bonds or cash for stability.
Look for Buying opportunities
For investors with a higher risk tolerance, market downturns present opportunities to buy stocks at a discount. Look for high-quality companies with strong fundamentals that are trading well below their intrinsic value.
- Focus on sectors that have been oversold and are primed for a rebound, like financials, industrials, and materials. Also consider growth areas like technology, which will benefit as the economy recovers.
- Look for companies with lots of cash on hand, consistent free cash flow, and little debt. They will be better positioned to weather economic uncertainty.
- Dollar-cost average into new positions. Start with a small initial investment, then add more money over time. This allows you to take advantage of any further price drops.
Protect Yourself with Stop-losses
For investors concerned about heavy losses, using stop-loss orders is a good way to limit downside risk. A stop-loss order will automatically sell a stock once it reaches a certain price threshold.
- Place stop-losses 5 to 10 percent below your purchase price for stocks. This gives the stock some room to fluctuate but will trigger a sale if it starts to drop substantially.
- Trail your stop-losses as a stock’s price rises. For example, move a stop-loss up to 5 percent below the new peak price. This locks in profits but leaves room for normal volatility.
- Be willing to repurchase a stock if the price starts to recover and the reasons you first bought it remain intact. But only do so if it aligns with your investment goals.
Stay invested for the long run, look for buying opportunities, and use stop-losses to protect yourself. Following these principles will help you navigate market volatility and work towards achieving your financial objectives.
The market has always fluctuated, but recent volatility has sent many fleeing for the exits. That said, some see opportunity in the chaos and are doubling down despite the risks. As an investor, you must determine your risk tolerance and investment horizon to make the best choice for your situation. If you are nearing or in retirement, preserving capital may be your priority. For younger investors, staying invested for the long term while prices are depressed may lead to greater returns. No one can predict the bottom or top of the market with certainty. However, through diversification, discipline, and patience, you can ride out the storms and reap the rewards of the inevitable market recoveries that follow. The decision is never easy, but with prudent planning, you can achieve your financial goals regardless of market conditions. Stay focused on your investment objectives, review and rebalance as needed, and keep your eye on the long game.