- Stock markets threw up one of the best investing lessons in 2020, exhibiting massive volatility, emotional swings, erratic moves, and multi-bagger returns.
- It seems to be the right time for investors to chart out their investment plans for the upcoming year.
- Some investing tips can help investors to manage their stock portfolio and beat the stock market volatility in 2021.
The year 2020 has been an end-to-end investing lesson for even the astute investors amid the virus crisis. As we are inching towards the year end, the 2021 investment game is all about learning from the mistakes and charting out a smart and diversified portfolio to beat market uncertainty.
This year equity market demonstrated sinusoidal trends that left the investors in awe. First, COVID-19 triggered a global meltdown in March 2020, thrashing the equity markets to multi-year low levels. Then, coronavirus vaccine and economic recovery hopes stimulated an unprecedented rally in the stock markets, with several stocks soaring to all-time high levels.
The NZX 50 index also witnessed a similar trend, falling to 2018 lows in March 2020, and marking a sharp turnaround since then. At present, the NZX index is trading at its all-time high level of over 12,880 points, setting a new record.
No doubt, smart investors who would have bought stocks at dirt-cheap prices during the March crash must be sitting at decent profits if not multifold returns while entering 2021.
Given this backdrop, here are five key tips for investors that can help them navigate through stock market volatility in 2021:
- Keep it Super Simple
The world of investing might seem complicated, especially to the ones who are new to investing. The more you dive deeper into this world, the more you would encounter complex ratios, elaborated financial statements and convoluted excel sheets. While all these intricacies are essential to analyse stocks and make better-informed decisions, investors can outsmart this complexity with simplicity.
Remember, you need not be the wolf of the wall street to start investing or fetch a decent return consistently. The renowned investor Mr Warren Buffet also suggests that “You don't need extraordinary intelligence to succeed as an investor.”
Investors can keep it simple, investing within their circle of competence while refraining from taking exposure in companies they do not understand. Retaining simplicity in the investment portfolio not only reduces the risk of potential losses, but also pays off well over the long run.
- Diversify Your Risk
Remember, Mr Warren Buffet’s famous saying – “Do not put all your eggs in one basket”. The saying refers to the importance of diversification in the investing world, which means spreading the risk of capital loss across various investments. While an unpleasant event can easily trigger losses in an individual asset or a single asset class, the possibility of different asset classes plummeting at the same time is highly unlikely.
Investors can minimise the risk of losses by diversifying the funds into different sectors in a single asset class like equity or even other asset classes like bonds, gold etc.
Besides, investing in inversely correlated assets can be an effective hedging strategy for portfolio protection. For instance, investors can hedge against equity market dip via investment in a haven like gold.
- Keep Emotional Decisions at Bay
Emotions like fear and greed have proven to be the biggest enemy of an investor in financial markets. These emotions hold power to manipulate the thought process of even seasoned investors, thereby hampering their portfolio returns.
The fear of collapsing can deter an investor from entering a meaningful dip or can entice him to get out of a profitable investment prematurely. Similarly, the greed of making more profits can give rise to unrealistic expectations, attracting investors towards high-risk investments that may be beyond their risk appetite.
Investors can control these emotional swings by refraining from making oversized bets, no matter how much informed an investment decision is.
- Buy Companies, Not Stocks
Bear in mind; an investor is a shareholder or a part-owner of the company and not an outsider. Hence, before becoming a part-owner, it is imperative for investors to perform thorough research on the company’s business model, management, and financials besides studying stock price movements.
To keep it simple, investors can focus on buying quality businesses while using a mix of fundamental and technical analysis to score big in investing game.
- Know Your Risk Tolerance
The financial market as a whole is a risky place, and every investment is associated with risk. Hence, it is crucial for investors to first analyse their risk tolerance and then handpick companies that fit within their level of risk appetite. For instance, small caps space can be a good playing field for high-risk investors but not for risk-averse investors.
Generally, investors’ level of risk tolerance depends on factors such as financial stability and the age of the investor. Being cognizant with their individual risk appetite is crucial for investors to invest as per their personality, timeline and goals. Moreover, risk tolerance enables investors to withstand losses at the time their investment performs poorly.
In addition to these five essential tips, there are a whole lot more which could come in handy for an investor while investing in 2021.
One needs to understand that investing is more of an art, and just like art, there are no fixed rules to it. Therefore, what works for one investor may or may not work for others, making it imperative for market participants to carve and stick to their own niche.