Understanding the emotion of the markets is just as important as getting a handle on the fundamentals. Here are my top strategies to cope with volatile sharemarkets.
Never forget markets are simply a collection of people making investment decisions. Those people have the same human emotions as everyone else. They make rash decisions, are gripped by fear of the unknown and have a herd mentality because they don’t want to stand out if they’re wrong.
That’s why sometimes markets can appear to be overly skittish when the reality doesn’t seem to justify the rash decisions.
Double-check your superannuation 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 overexposed to shares in relation to your individual circumstances, chat with the fund about rebalancing.
While super fund returns will be hit by volatile sharemarkets, remember it won’t be as bad as the general sharemarket. That’s because most super fund managers have a diverse portfolio across property and fixed interest investments 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’re nervously watching share prices drop and your gains dwindle away. Is it time to bite the bullet, call a broker and sell out?
Investors should be considering their share holdings in the light of longer term factors. Volatile sharemarkets and the resulting short-term falls in stock prices are part and parcel of investing in the sharemarket.
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 on your investments.
Assess the fundamentals of each company
There are two levels of influence affecting the movement of share prices.
The first is the overall economic climate. Share prices are affected by the level of 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, strength of management, history of the company, competition and level of debt.
Whenever a share price falls, shareholders are best to go back and review these fundamentals of a company.
The most important question for investors to ask themselves is whether this fall changes the overall view of the company?
Stay on the sidelines and watch
There are basically three choices for share investors: buy, sell or do nothing.
When faced with volatile sharemarkets, if 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 the market until a longer term trend becomes apparent.