Knowing when to invest and when to wait can be the difference between making or breaking your funds. Those dips in the market can be agonising to watch and we’ve all realised at some point that hindsight is 20-20. Unfortunately, it’s not always that easy to predict your investments so that you don’t make a loss. Here is some advice on how to understand the investment market:
Review Long-Term Cycles
Market timing and investing can be two strategies that can provide solid returns over the years. However, it does require time, commitment and money. The first thing you should do is to study the long-term cycles of the markets.
By studying these you’ll be able to get a general idea for the trends, interest rate fluctuations and how certain events have affected the markets. Buying and selling based on the expected price fluctuations can be a risky strategy so the more information you have, the better your chances that you will turn a profit.
Prepare for Overreactions
Unfortunately, the market does have a habit of overreacting. Typically, investors don’t do as well because of emotional investing behaviour, for example buying when a stock price is high and then selling as soon as there is bad news. Buying high and selling low is an easy mistake to make and one that will cost you. However, once you realise that, you can then profit from others making that same mistake when the market overreacts.
“Don’t let your emotions get the better of you after seeing an earnings report either. Keep your head, check the prices in relation to monthly support and resistance levels and review the information you have before making a decision,” says Jeff Sullivan, financial analyst and contributor to Last Minute Writing and Researchpapersuk.
Small Dips Still Make Profit
Guessing when the market will dip is just that – guessing. But it doesn’t mean that you can’t make a profit when a dip occurs. Major political announcements, economic changes, company news and acquisitions can all lead to market overreactions. Just look at what happens every time negative news comes out about Trump or Brexit.
The market overreacts but then recovers, this provides the perfect opportunity for you to buy a broad market fund and sell for a quick profit.
Diversify Your Investments
It’s important not to put all of your eggs in one basket. By studying the correlation between markets, you will see that even seemingly unrelated positions may be correlated. This means that if a significant economic event occurs it can destroy your annual returns.
This risk can be reduced by coupling each position with a related index or ETF. You will need to study the correlations in the market at least once a quarter if not monthly. Look for the strengths in the correlated markets you have chosen so you can identify the best positions.
Predicting the Unpredictable
No matter how much studying you do, the market can at times be unpredictable even to the most seasoned of investors. This can be due to a number of reasons such as an unexpected political event or simply down to investor psychology. It is one thing to make predictions based on facts but quite another when the pattern becomes irrational.
“Spreading out your investments can help to mitigate this, but certain events can cause a disastrous downward spiral of the market. With some events there is no clear path to profits and it is up to you to identify these. They tend to be more complex issues such as Brexit, which are much harder to predict than a clear-cut announcement or merger,” shares Angelo Williams, personal finance adviser.
The Right Timing
If you time it well, you can come out with a good profit but sometimes you may also make a loss. The key is to make decisions based upon the best information you have and not based upon emotion. Limiting your exposure and going for the small profits earned from the ups and downs in the market is one of the best routes to investment success.