Volatility in the stock markets triggered by the pandemic-led global recession is a cause of concern for everyone. A study of the past catastrophes and the succeeding crises can give ideas of how to assess the situation.
Experts predict an inherent risk factor when the stock market indices fall over twenty percent from their peak (or 52-week high) in a bear market. How do you cope with such a volatile situation? What can be your strategy in the New Normal?
We look at the factors that have a significant impact on your investment. Also, we touch upon the crucial aspects of money management in this new era.
This factor highlights the conditions when the stock prices inflate highly due to market volatility. The market, being bullish in the recent past, attracted many investors.
Before the market took the plunge, the investments were towards stock purchases at higher valuations. You can substantiate this piece of information by tallying with the rapid rise in the P/E ratio. The chief reason for this is the investments in speculation and not evaluating the stock fundamentals.
The observations that showcased signs of economic recessions include degrowth of the GDP for two consecutive quarters. The US economy shrunk by approximately thirty-three percent in Q2 2020.
You can consider the factors that were outcomes of the seizure of economic activities for a prolonged time. The consumption, production capacity, import & export, and investment were all at their minimum levels. Unemployment hit higher numbers as the situation progressed.
The Federal Reserve’s steps to curb inflation include increasing the policy interest rates. These help ensure to reduce the economic risks and help the economy to grow fast.
The financial repercussions of increased policy interest rates are higher commercial costs for companies. Thus it makes the stocks less attractive to investors. It is especially true when you compare it to the debt instruments. Here the return on interest increases significantly compared to the dividend yield of the stocks.
Since consumer goods across the globe have the standard specifications, the prices exhibit similar variations in all markets. The commodity prices get determined by the demand and supply in the global markets.
So whenever unforeseen situations take place, the prices of the commodities heat up. The prices may ascend, and as a result, the economy and the stock markets see a deep dive.
You can comprehend this better if you consider the artificial oil crisis set in 1973 due to the cancellation of the oil exports by the Petroleum Exporting Countries to the US. The prices jumped by three hundred percent from $3 to $12 a barrel.
The investors withdrew their money, and the S&P 500 and the US Stock market saw a forty percent drop. The anticipation of the crisis led to stock sales and ultimately an economic crisis.
Assessing the current set of assets is the first step towards investing in this new era. You can evaluate the income-expense ratios for each month and conclude how long your assets can support you. Ideally, there should be a reserve for twelve months as crises are uncertain.
The next step is to cut down any unjust expenses and stay away from creating any new debts. Alternatively, you can also seek the support of professional accountants. A team of experts can provide the best accounting solutions for your business and personal accounts.
Before initiating any investment process, you can have a proper plan in place. Identifying the risks associated with each investment is crucial. You should be aware of them and ready to take the heat.
Diversifying your investment can be one of the best solutions to reduce the risk significantly. It helps protect the assets as well as create profitable opportunities for you.
Age is a vital factor to consider. Young investors can have a higher propensity to take risks than their older counterparts. A thumb rule to refer to calculate risk can be 100 minus age. If you are at 30, then your risk appetite will be 70%.
Another aspect is the time the sooner you start, the better results it will garner for you.
The above are some suggestive ways to tackle your risks in an uncalled situation like the pandemic. You can also choose to cut your losses and built-in investment discipline to eliminate the distractions in the market due to any volatility.