Investing in an Uncertain World
Here’s an example of how uncertainty can affect the average investor: prior to the 2016 US Election Day, most polls had projected a Hillary Clinton victory. The eventual result was different, not to mention unexpected. The shock impacted the markets even before the official winner was declared. As Donald Trump’s victory became more and more assured, gold prices soared; the metal is generally seen as a safe asset and a hedge against inflation. Meanwhile, emerging market stocks tumbled and the US dollar reached its highest point since 2003.
In the immediate aftermath of the 2016 USA elections, the markets certainly reacted and all this fluctuation reflects anxiety for the future. Investors asked: is a long-term market stability still possible? Will the markets continue on this volatile streak? Will they calm after a while? Given a situation of financial instability, what should the typical investor do?
Donald Trump’s victory was a catalyst for financial swings, but the reality is, market instability often happens and investors need to prepare accordingly. Certain (but not excessive) precautions should be taken to buffer against unexpected upheavals. How to do so? Diversify your portfolio, hunt for new investment opportunities, and stay calm even during choppy times.
Diversify Your Portfolio
Political events often upset both the markets and investor confidence. Some investors choose to behave in a more conservative manner (see the spike in demand for gold immediately after the 2016 USA presidential elections). Others choose to try and time the market in the middle of insecure times by pulling their assets and getting back in later when the markets stabilize.
But timing the market is a very risky affair, even for experts. If you want to fortify your portfolio in anxious times, you should diversify across different asset classes and rebalance your instruments periodically to maintain your risk profile.
Telling investors to diversify is very basic advice, but think about it. Diversifying your investments is something you can control in the midst of uncertainty. You get to choose which instruments to purchase and how much money you are comfortable allocating into each asset class.
The main idea here is to balance the potential for risk and reward. For example, let’s say your portfolio consists of company stocks and precious metals. Your stock value may have been erratic over the USA election season, but the value of your gold has gone up. As you can see, with a well-diversified portfolio, you remain in the clear if the stock markets fluctuate for the long-term, as your returns aren’t determined by the performance of a single asset class.
Don’t overload yourself with real-time market information, but do look at all asset classes and see how they will fit into your portfolio and your risk tolerance. The bottom line is: if your overall portfolio is doing fine, then geopolitical situations matter less.
This Is a Good Time to Hunt for New Investment Opportunities
If you think your investment portfolio is already well-balanced and you have covered the basics (fixed deposits, bonds, gold, stocks, etc), you can research new places to invest your money. There is an advantage to routinely looking at all the available options and seeing how they fit your portfolio because over time, asset classes produce different results. So to maintain your preferred risk profile, an investment portfolio needs periodic rebalancing.
If the current market climate is rendering you a little skittish, you can try investing small sums into alternatives. Technology, for instance, can be a promising sector.
Internet stocks are obvious suspects. Think about how essential brands like Google have become. But note that unless you are an early investor in these tech companies, your returns won’t be spectacular. Also, if you already own company stocks, other areas in technology can answer the gap in your portfolio.
Innovative and profitable technology companies are not exclusive to Western markets. One technology-based investment opportunity that has arrived in Malaysia is peer-to-peer (P2P) financing, which utilized online platforms to match small and medium-sized enterprises (SMEs) and investors. SMEs take out financing for working capital or other business necessities, while investors who had collectively funded the financing opportunities gain interest-based earnings in return. Investing in P2P financing has several benefits: good return rates higher than deposits or bonds, a low entry barrier suitable for those wanting to try the business model first, and a streamlined online process.
Despite being a relatively new instrument, a study by the UK Peer to Peer Finance Association (P2PFA) stated that so long as investors are educated and the regulatory framework is sound, P2P financing does not create systemic risk. In fact, defaults would need to increase at least threefold from current levels to whittle down investor interest rates to below zero.
These days, certain apps can give you real-time updates on your favorite investments or even figure out the best investment mix for you. New opportunities are out there. Take the time to research and find new investments you can be confident in. Look for instruments with good growth that you can feel secure in.
Stay Calm and Don’t Make Rash Decisions
Yes, it can be difficult to enact this advice when your portfolio contains your hard-earned money, future hopes, and retirement plans. Investing can be as emotional as politics, making it difficult to stop watching the market’s every move. Yet it is counterproductive to overanalyze the current situation; there are too many variables. All the information overload can induce panic and cause you to “sell low, buy high” instead of the other way around. Additionally, don’t succumb to the temptation of making speculations. Impulsive decisions can change your portfolio drastically and at the moment, you need a balanced and stable portfol