There is a lot happening in the world of investments today. The increased volatility is worsened by the electioneering period and we have seen the same cycle continue year on year. Even during this time of uncertainty, it is good to note that “The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. Not only is the mere drop in stock prices not a risk, but it is an opportunity.” Li Lu. So the question then comes how we can increase the odds of getting it right when it comes to investment.
The starting point is that one should adopt goal-based investments. One should start by asking themselves to what end they are investing and what are the best assets they need to invest in for the specific need. When one is looking at goals based on time, the short-term goals like school fees or emergency kitty should be put in less risky investments like bank deposits and money market funds.
When one is investing never invest in that which you do not understand. If someone gets over to explain, be sure to ask for time to seek information about how the asset class operates. There is no shortcut to this because even the asset classes that are considered riskless like government bonds have their own kind of risk. Let us take for example government bonds if one needs to sell some bond that they bought a year or so ago, there is a high likelihood that they will lose part of the principle since the interest rates have gone up leading to a lower value. For someone who did not expect this, it becomes a very big challenge for them. “Know what you own, and know why you own it.” — Peter Lynch
When investing in the stock market, there are different ways of deciding which stock to buy. One needs to be careful so that they only invest in companies that are fundamentally sound so that even when the market is down, one is sure that it is just a matter of time before they see the markets up again. The market has been down this year due to the investor sentiment but we have seen some recovery and we expect that even more recovery shall be seen in the companies whose fundamentals are good. Spending time looking at the right things is key. So, in addition to looking at comparable (relative valuations) and studying the stock trend, one should be sure to understand the basics of how the company makes money and how the current and future environment affects the company’s operations, and how the company is gearing themselves to take advantage of those. Warren Buffet says that we should only invest in companies that we are happy to hold even if the stock market shuts. Courage taught me no matter how bad a crisis gets … any sound investment will eventually pay off.” — Carlos Slim Helu
In every crisis or market downturn, there is always an opportunity. The question is always how we spot it and how we should take advantage of it. When the markets are down the key question is always to see what assets will do well and that is what most contrarian investors do. Like John Templeton “To buy when others are despondently selling and to sell when others are euphorically buying takes the greatest courage, but provides the greatest profit Bull markets are born in pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell If you want to have a better performance than the crowd, you must do things differently from the crowd” the aim here is to ensure that we understand what we are doing and not to just be contrarian for the sake of it.
Investments require time investment one should seek to look at how much time they have and from that decide which course of action they need to take. Let us take an example of starting a business if one does not have the time to invest in it, it is a sure way of losing their hard-earned capital. So not only should we be understanding the business we are getting into, but we should also be ready to sacrifice and put in the time.
Finally, in investment, having the right partners all the way to help makes things easier and more bearable for you. Look at firms that share your values and whose performance is aligned with your own so that we know that the success and the risks shall be shared both ways. When seeking this, getting an advisor who shall help guide you in the process is important so that you know what you need to do across the board.
So, in conclusion, know why you are investing, follow the right process, have the right people around you and be ready to stick it out. It shall not always be easy and rosy but it shall be for sure worth it.