It is uncertain that an investor should be advised to
wait until the stock goes down and then buy as this may involve a long wait,
which is likely to result in a potentially losing out on worth while
opportunities. Although the best time to buy stock is when its value is lower,
it may be also best for investor to initiate a dollar-cost averaging strategy
or buy stocks whenever you have capital to invest, except when the general
market level is higher and can’t be justified by stander established of value.
When the investor initiates a dollar-cost averaging
strategy, he can aim to invest more capital when the share price falls and less
when the share price rises. Dollar-cost averaging is a good strategy for
investors with lower risk tolerance, since putting a lump sum of capital into
the market all at once can run the risk of buying at a peak, which can be
unsettling if prices fall.
By monitoring the historical price, it is known that
two-thirds of the time, the stock market goes up for the long term. This has
led us to say that investing in the stock market successfully requires
research, patience and high discipline. Success in the stock market could
mostly be achieved over the long term. However, to be assured of decent
profits, you must pay attention to the quality of companies with strong
long-term prospects.
Comparing to entrepreneur or bond investments, the
stock market tends to be less affective at beating inflation given its rate of
return, as the growth of stock markets may be slowed during inflation periods.
Therefore, you should avoid investing in stocks that are expensively priced
compared to the rest of the market.
During high inflation, investor should consider
investing in cyclical companies, which follow the cycles of an economy. That
means in industrial, energy, and consumer sectors, for example, investors can
invest in companies that can generate high earnings, profits, dividends, and
cash flow over the long term. Therefore, owning company stocks with lower fixed
production costs, a higher pricing power, and lower labor exposure, is
advantageous to investors.
How to Mitigate risks
However, for the beginners in the
financial market, they should ask themselves what steps can they take to mitigate
investment risks? In the financial market, there are a number of ways to
mitigate the types of risks that might cause us fear to invest. For beginners,
the most common investment approaches before investing include proper research
of the market, portfolio diversification, and dollar cost averaging, among
others. All these approaches are great ways to mitigate and reduce risk.
The majority of the people investing in funds are
doing so for the reason that funds are safer and have lower fees, but also, investors
are investing in stock, as they’ve heard this often repeated that stocks on
average have a higher income than other assets, such as funds.
Unfortunately, sometimes past performance doesn’t
predict future performance. Besides, when we study the historical data, we can
see that occasionally averages doesn’t always predict future. What is for sure
is that the financial market has periodically fluctuational ups and downs. For
instance, from 1965 to 1983, there was very little growth. In the 1950s, 80s,
and 90s, there was double-digit growth, and in the 2000s, there was negative
growth.
In the world of stocks, investors should check P/E
index, a price earnings ratio based on average inflation-adjusted earnings of a
company from the previous five years, for instance. The median P/E Ratio has
historically been around or below 16. It’s a good barometer of what value an
investor should be targeting. Again, a P/E of 16 means that it costs an
investor about 16 USD for every one USD of earnings they receive by investing
in that stock. The higher the P/E ratio, the more investors are paying for each
dollar of earnings. For instance, an investor should consider to invest in a
company that has a lower P/E or below 16, rather than a company with a higher
P/E or above 20.
Looking back in time, we can see that there have been
a few periods that the P/E Ratio for the S&P 500 has been above this level.
Before the crash of 1929, prices almost doubled and investors were paying up to
30 USD for every dollar of earnings from the S&P 500. And during the
dot-com boom, investors were paying even higher for companies that had zero
earnings.
When the price of stocks gets high, investors must ask
themselves, are these high-priced companies cranking out enough dollar bills to
still be valuable investments to buy? Are the profits worth the expensive
price? The moment you see that the P/E ratios are too high, you must stop
purchasing these stocks, otherwise, you only continue to buy if you see
growth.
When look back historically, there have only been a
couple of times in the past that investors have been paying high for stocks. As
the dot-com bubble began to reveal itself, when investors were paying 44 USD
for one USD of earnings, the dot-com crisis occurred.
Also, part of the problem in the slowdown of the
financial market can be blamed on strategies introduced by some government; for
instance, the United States Federal Reserve action following the 2008 financial
crisis. Similarly, to what happened during the COVID-19 pandemic of 2020, the
Federal Reserve and other Central Banks around the world, reduced interest
rates on major loans, pumped billions of dollars into the market by buying up
bonds and mortgage-backed securities, which in turn stabilized the global
economy, allowing investors to use that capital to bid up stock prices. This
step mostly drove inflation higher.
Therefore, to reduce or stabilize inflation, after the
financial crisis of 2008 , the Federal Reserve curtailed its spending and
started to increase interest rates. Unfortunately, with the Federal Reserve and
global Central Banks continuing to draw back their financial supports, stock
market growth slowed down.
Similar to the COVID-19 crisis in January 2022. As a
result, despite a global pandemic of COVID-19 and the highest inflation in 40
years, at the end of 2021, the S&P 500 rallied 26 percent, which was on top
of a 17 percent gain the prior year. But the stock markets are expecting
decline, as soon as the governments start to reduce their financial supports.
To edge against such uncertainties, investors should
develop both the right savings, consistent habits and investment strategies,
and also invest in a broadly diversified portfolio. Noticing that the markets
are inherently volatile. There will always be ups and downs, but over a
significant period of time, the likelihood is that the financial market will rise.
With no control over returns, investors’ focus must be
on minimizing unnecessary expenses and taxes. That means putting a little bit
more toward saving goals every month. Some may advise investors to also focus
on paying off what they owe on credit cards, student loans, mortgage debts, and
other loans, for instance.
To learn more about the stocks, you can purchase THE FIRST INVESTOR book and receive a discount by clicking on The First Investor