Six Important Investing Principles In A Volatile Market
The financial markets are one of the most promising investment arenas to exist, but they are also volatile and susceptible to the world economy. Any particular occurrence in the world economy could affect the financial markets, and so it is crucial for investors to remember the six most important investing principles that will help them stay protected even during times of economic downturns. These principles are:
1. Always stick to your investment strategy
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Before an investor invests in the stock market, they prepare a trading or investment strategy with their investment goals, objectives, risk appetite and other information related to their trading behaviour. This strategy consists of things like when the investor wishes to enter or exit the market and for how long. It also includes their capital invested, how much they can expand, and the level of risk they can undertake.
It is essential for investors to stick to this investment strategy or plan irrespective of the situation, as that is the only process that will help them achieve their investment goals. Review your trading strategy regularly and make changes accordingly to your current state of presence. When you stick to your investment plan, you avoid any short-term fluctuations that may result in significant losses later.
2. Don’t only stick to cash
Storing all the money in cash, especially during times of volatility or crisis, can seem like a safe option. However, soaring inflation is most likely going to eat up the entire value of the cash stored money within a few days. Inflationary shocks are worsened as commodity prices inflate, especially the energy prices as currently seen, and saps economic growth to an unprecedented level. Most investors with a long-term perspective need to ensure that the cash holding is supplemented with an amount in the form of securities as well that can offer capital growth in the long term.
3. Always diversify the investment
Diversification is one of the most important investing principles and the key to a successful investment plan. If investing in the stock market, it is always advised to diversify your portfolio in a way that you have large-cap, mid-cap and small-cap stocks that offer both high risk and high return in some way or the another.
This helps you lock in profits but also protects you against any severe economic fall. In fluctuating markets, when one type of asset performs poorly, there is always another asset that performs incredibly well and covers for the losses of the others. Diversification helps investors flourish in both rising and falling markets as it includes a range of different asset classes that minimizes portfolio risk and maximizes profit potential.
4. Start as early as possible
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When was the best time plant a tree? 20 years ago. So when is the next best time to plant one? Now! Getting started with investing is widely touted as one of those important investing principles that makes the biggest impact. Investing as early as possible helps build big investors in the long term. The earlier you start investing in life, the faster you can begin to grow, and the better chances you have on incredible long-term capital growth. The compounded growth is robust when you start early, and it is best to enter the investment game when you have the capacity to take risks and have a clear financial plan, growth trajectory and financial advisor handy.
5. Avoid activity bias
Activity bias, also known as the urge to just do something in the market and not sit idle, is one of the biggest challenges that hamper investment growth. Investors should avoid taking action just for its sake during a crisis and wait for things to settle down and markets to recover.
When investment values fall, instead of abandoning investment plans and selling the securities, investors should focus on staying calm and wait for prices to reverse to benefit from the growing markets later. Each market follows a cycle of a downfall followed by an uptrend, and it is necessary that investors understand that each falling market is always supported by a rising one. Short term dips are always smoothed out in the long term and should not affect long term investors’ investment decisions.
6. There is no substitute for your personalised investment strategy/plan
Each investor is different and has different needs, requirements and investment goals. Some are risk-averse, whereas some are able to take big risks in the market. There is no substitute for the investment plan that is specifically curated for you, especially during volatility periods. Just because a particular thing worked out for one investor does not mean it will work out for you too. This is why it is vital that you focus on the plan that is created only for you instead of looking for alternative options because, honestly, there is not any.
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