What newbie investors need to know about stock market volatility and how to prepare for a downturn
For millennial investor Simran Kaur, the best way to mitigate equity market volatility is to avoid selecting stocks for the majority of his investments and instead focusing on index funds.
Kaur says she started investing in earnest early last year, around the same time the Covid-19 pandemic was causing the biggest stock market crash since the 2008 global financial crisis.
Since then, markets have been in a state of heightened volatility as new variants of Covid-19, supply chain constraints and rising inflation shake investor confidence.
Kaur, who hosts the personal finance podcast Girls That Invest with her friend Sonya Gupthan, both 25, says that even though she buys shares of individual companies, around 80 to 90 percent of her investments are in a S&P 500 index fund.
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She says this type of passive investing has a proven track record and having her investment in an index fund reduces your risk by diversifying your exposure across a wide range of companies, geographies and sectors.
This helps to overcome periods of market volatility, which she expects to see more of in the years to come.
She says the most successful investors will be those who have the âemotional disciplineâ to stay the course when they see their investments plummet.
But she recognizes that it’s not easy to keep a cool head when stock prices fall.
âNo one is immune to not feeling good when they see their stock drop, especially when you’re a beginner. “
The most common mistake people make when investing is picking a few companies and crossing their fingers and hoping for the best, she says.
âInvesting is not playing, you make a little effort to understand what you are getting yourself into. “
The market surveillance authority, the AutoritÃ© des marchÃ©s financiers (FMA), has launched a campaign to help first-time investors understand that volatility is an expected feature of markets and how to best prepare for inevitable downturns.
Recent FMA research on investor platforms and KiwiSaver’s changing behavior has shown that some new investors may not be prepared for a market downturn.
FMA Director of Investment Management Paul Gregory says Christmas is a time when people are trying to invest in the stock market for the first time, so it is a good time for them to understand what is happening. ‘wait for markets.
He says all markets have some degree of volatility.
âIt’s just part of the investment,â says Gregory.
âBecause he’s still here, it shouldn’t come as a surprise. “
He says volatility “won’t be your friend” for those looking to invest for the short term, but there is nothing to fear for long term investors as long as they have a good plan to stick to. hold.
âOverall volatility isn’t bad, it’s just what’s happening. But volatility is bad if you need your money really fast, and you get volatility right before you have to withdraw it. “
Volatility can give long-term investors a sense of uncertainty about achieving their investment goals, he says.
“But because you don’t take your money out, that loss or that uncertainty doesn’t crystallize, it’s on paper, but it’s still non-compliant.”
If investors act on emotion and sell their stocks when the price drops, they have suffered a loss, he says. If they buy the stock when it bounces, they pay a premium.
He says the timing of the market is difficult, even for professionals.
âYour time in the market is much more likely to work for you than it is to time the market. “
Volatility can be overcome by the way a portfolio is structured, but also by showing emotional control and discipline, he says.
“It’s difficult because intellectually knowing how volatility works is one thing, going through it is another.”
Investors need to be emotionally prepared for the experience of volatility, he says.
Leighton Roberts, co-founder of the Sharesies stock trading platform, says the volatility in the stock markets since the start of the pandemic has been unprecedented.
He says a common mistake newbie investors make is looking too often at their stocks and the market and reacting to short-term movements, he said.
He says making a plan and sticking to it for the long term is key to a successful investment.
“In order for that to be motivating, you really have to get people to really want to do and stick to it.”
Before investing in a business, people should do their own research and consider whether the business is likely to exist for the long term, he says.
âYou need to know a business before you invest in it. This way you can stand behind.
“If you don’t see the business in existence 10 or 20 years from now, it’s probably not a good bet.”
Kristen Lunman, managing director of stock trading platform Hatch, said we can expect stock market volatility until the pandemic is over and the economy picks up.
“It’s impossible to predict, so it’s best to be comfortable with the ups and downs of your investment portfolio in 2022.”
Many expect the coming year to bring persistent supply chain problems, increased inflation and possible continued restrictions with Omicron, she said.
The world’s best investors expect ups and downs and are comfortable with short-term shocks, she says.
âThey don’t panic and guess their plan. They know that stock markets can be very volatile and that long-term highs tend to outweigh lows. “
She says investors should consider stock market volatility as the admission price.
âShort-term bumpsâ are the price investors have to pay for long-term returns, she says.
âWe’re conditioned to think declines are a bad thing, but the reality is that falling stock prices should be largely irrelevant to long-term investors.
âIf the bumps are stressing you out, don’t look. Just stick to your plan and stop checking your actions. “
She says investors should consider investing regularly. So when a stock’s price goes down, they buy the stock for better value.
Fisher Funds chief investment officer Ashley Gardyne said market volatility was higher than usual, especially in the past three months.
He says beginners often wonder when is a good time to enter the stock market.
âWe always say it’s better to start. Take it little by little and have a plan, âGardyne says.
âInvesting is really a game for the long term, so if you have a plan and stick to it, you tend to do well in the long term. “
Many investors put regular payments into their investments to ease the ups and downs, he says.
âA regular savings program makes a lot of sense. “
To mitigate volatility, investors may want to invest in the broad market or in established companies rather than buying speculative stocks in the hope of investing in the next big deal.
âIt’s the old lesson that slowness and consistency wins the race.
âYou don’t have to invest in the latest and greatest. “