Learning the big sharemarket lessons needn’t cost you your savings.
On any given day, week or month, share prices are affected by variables that are outside an investor’s control. When those variables make the sharemarket go up, we celebrate. But when things are down, many panic and start offloading their shares in an attempt to stop the slide.
Take the way the ASX has sailed through COVID. Despite all of the hype in the media regarding an impending recession or pullback. It may still happen, of course (see the recent RBA announcement), but to date, the sharemarket has been pretty tame.
We’ve thankfully come through unscathed… and new record highs keep being set. In October, the All Ords rose by 0.1 per cent with the ASX 200 index down just 0.1 per cent. So it was a decidedly tame month.
Always remember that the sharemarket has a way of righting itself over time. Here are my five key sharemarket lessons for you to take on board.
1. Observe the herd rather than follow blindly
The psychology of markets is just so powerful. In times of panic many take comfort in running with the pack. If the headlines are screaming “sell!”, it’s easy to buy into the hype and hit the panic button, particularly for novice investors. But don’t let the hype influence your decisions!
As we can see by the way the ASX is tracking, when things appear to go belly-up, in all likelihood the world isn’t actually ending.
Remember, even the most seasoned gurus have a hard time predicting the future, so take the hype with a reasonable grain of salt, do your own research and get good advice.
2. Remove the emotion from your decisions
As I mentioned above, emotions cloud your judgement when it comes to investment decisions, whether you’re buying or selling. Try to sever them from your investment process.
A good way to do this is to clearly set out your investment goals and put a long-term strategy in place to achieve them.
Be disciplined with your approach and don’t allow emotional factors to drive your decisions. Emotions can have a tricky way of influencing us into making bad decisions. Investing is no different.
3. Understand market cycles
Every investment market follows a cycle. The stock market certainly has its ups and downs, but that’s ok. If you take on board none of the other sharemarket lessons, at least remember this one.
The stock market, like the property market, goes through cycles, and they can be influenced by many different factors. What’s important is that you understand these ebbs and flows and where you are in the cycle.
Selling at the bottom of a cycle when prices are down means you miss out on the upside when prices recover, as they often do.
Get to know how they work, particularly when clouds are forming and panic selling starts to take hold – does it align with a trough in a major cycle?
4. Take advantage of low prices
“Be fearful when others are greedy and greedy when others are fearful”, is one of our favourite quotes from American investment guru Warren Buffett.
Market hysteria isn’t always a bad thing. In fact, in some cases it can be a great time to follow Warren Buffett’s lead and purchase quality shares at a low price.
Trying to pick a bottom for the market is pretty much impossible, but if you can identify good companies at prices that you believe represent value, then by the time the market turns around you may have already gained a tidy sum.
After all, to make a profit you need to buy low and sell high.
5. Ride out the lows
The alternative to finding opportunities when markets are down is to be prepared to ride out the lows. Those that stay in the market reap the benefits of a recovering market, while those who let their fear guide them likely sell at a lower price and lose out.
So the next time the market seemingly starts to panic, remember all of the predicted market crashes that never were. And don’t let your emotions get in the way of your investment decisions.
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