Op Ed: Why you shouldn’t make your investment decision based on panic during market volatility?

Content supplied by Forex Brokers SA

Financial Markets around the world and across Africa are currently highly volatile due to the effect of Coronavirus pandemic and oil price war.

Currencies, Oil & Stocks have all been hard hit and many major companies on Wall Street, European Indices & Emerging Economies indices & elsewhere including in Africa including JSE have lost 30-60% of their value, currency pairs of major countries & emerging economies have all been affected making them highly volatile & unpredictable.

Markets are being driven by human sentiment – fear more than ever. Fear emerging from uncertainty if the markets & economies could recover soon enough has made investors sell off otherwise considered strong assets & stocks.

In Africa, South Africa’s JSE 40 has lost R4.5 trillion Rand of its market cap – with most of the top 40 stocks losing almost 30% since the start of the year till mid-March 2020.

Like many other countries, SA went on lockdown for 21 days starting on 27th March 2020, and SA economy outlook has been downgraded by Moody’s on 27 March – sparking more fears of the selloff on South African Rand (ZAR), which is at its all-time low.

The Nigerian economy has also been badly affected by the crisis – with Naira trading at over N500 against USD on the futures market. Most stocks on Nigeria’s NSE All-share index have fallen by close to 30% from the year’s high.

Right now, it’s important as an investor to step back & control your fears amid this crisis and don’t let fear cloud your investing judgment. And look at market fundamentals, long term outlook among other factors.

What you should do?

Look at underlying factors like – financials, risks & performance:

Don’t base your decision on short term financial reports, news or based on fear, feeling or hunch.

Look at overall outlook & factors like – risks involved, long term returns etc.

As an equity investor – Check the company’s past financials & performance and overall outlook of the industry for the next few years.

Review Historic Performance of Company & Sector – See if the company has been performing well over the past 5-10 years and offering good dividends, EPS (Earnings per share).

See if the sector is core & strong – For example – sectors like Financial Services, Food & Agriculture and Telecom form a core part of any economy & they are expected to stay strong in the long run.

Ask Questions – Will the sector in which the company operates, perform well in the future? Has the sector performed well in the past? Does the sector have strong fundamentals? Is the company run properly with sound management?

If the company that you are invested in has some edge like – strong brand or innovative product/technology or strong backing that will make it stand out even when the sector is underperforming or even going down.

Like – Company might have diversified interests in different sectors, or they have strong credible backing like – Government-backed firms, or they are behind some promising or revolutionary technology – like AI or Pharma, etc. Anything that will make it stand strong in tough situations.

Considering current poor economic conditions & outlook – it’s important to look at if the effect on stock price is temporary – does the company have strong financials & track record that will help it come back after this slowdown. How soon that stock is expected to come back? Many strong global companies with a proven track record have shown to bounce back even stronger after slowdown or recession-like – Microsoft, Amazon & Bank of America.  

Look deeply into financials & performance and don’t hurry your decision.

As a commodity investor –

Commodity prices like that of Oil & Gold are dependent on demand & supply. Investors need to study the fundamentals of the underlying commodity and only then they should invest & don’t invest purely to make quick returns or based on feelings or emotions.

Gold is often considered to be safe-haven by most investors during market uncertainty. Gold prices have shown uptrend since 2008. And it has retained most of its value even during ups & downs. But even then, it can be risky for many investors.    

While Oil trading is mostly done by companies & funds, some individual speculators also participate. Oil prices have a very volatile history suggesting it is a very risky investment. Investors need to be cautious & calculate risks before investing in Oil and use risk hedging & risk management.

Oil prices normally fall when there is excessive output and demand is low. Like now – when the travel sector is affected by travel bans & automobile sector is cutting back on production amid a drop in demand due to coronavirus. Oil has seen a huge drop in demand and plus OPEC (oil-producing nations) are stuck in a price war, making oil prices fall drastically and making it highly volatile and unpredictable. Trading in oil has never been riskier.

Many investors around the world trade oil on major exchanges worldwide. In Africa too, Oil futures & options are traded on major exchanges like – JSE & NSE.

Demand for commodities like Oil will likely come back in the future with price correction & increased demand when the situation improves, but no one can predict with certainty of when or if. Making it a very risky investment.

Investors using proper analysis of all underlying factors know this.

As a currency trader – Currency performance is directly linked to economic & geopolitical indicators of the country. If you are trading a currency pair on futures & options market at JSE or with any South Africa based regulated forex broker – then check for the underlying overall economic outlook of the country with a long-term perspective.

While most speculation/trading on currencies is done on an intraday basis. It is best practice to maintain your position based on long term outlook & strong technical & fundamentals of the economy.

For example – During uncertain times, US Dollar becomes safe haven for most investors, so currencies of emerging economies like South Africa, Brazil, etc. would likely lose due to risk aversion. So, it is best to base your decision based on long term fundamentals.

Also, another factor to take into note is the overall economy & exports of the countries. The currencies of commodity-based economies have been especially hard hit. Forex: Nigerian Naira has been devalued by CBN due to the 2020’s oil crisis. In the past as well the Naira was affected in 2017 due to the oil price drop.

Moreover, use proper risk & money management and don’t let emotions overtake your judgment.

Think long term & stick to your investment plan

Think about your long term plan while investing in any asset class. In short or intra-day, you will likely see a lot of up & down movements.

But if you look at the bigger chart- then the asset may actually be in a trending market. So it is really essential to get the bigger view – research through the fundamental factors and base your investment decisions likewise.

Once you have made the investment decision based on your research – then stick to it unless there is something really bad that conflicts your original long-term analysis.

What you shouldn’t do?

Try to pick the top or bottom 

Many investors who are looking to make a profit from this situation or any rising/falling market make this mistake. They obsess about entering or exiting the market at the right price – the highest or lowest price.

It is almost impossible for anyone (even the seasoned investors) to predict every market move – even with the right analysis tools & news. Now, almost every investor has access to the same information & technical analysis – so it wouldn’t give any extra edge to an investor.

Plus, even if one could perfectly predict one move, he would have to time the move twice to get in & out of the market at the right price. Which is near impossible to get correct all the time.

Don’t try to catch every move of the market – tops & bottoms and rely on fundamentals & think long term.

Get Emotional & lose control of the situation

It’s very important to control your emotions during market volatility, and not panic. It is easier to get carried away by the flood of bad news, and the erratic market movements.

Market ups & downs are a normal things in the short term. It’s important to stick with your long-term investment strategy & not let emotions change it.

Don’t panic if the market is going against you in the short term. Think about the bigger picture – based on your strategy, that made you enter the market position in the first place.

Use too much margin or leverage

This Is the most common mistake that new traders make when trading currencies or derivatives or commodities.

Many CFD brokers offer forex trading with a very high margin, sometimes it is even as high as 2000:1 leverage at some brokers. Also, forex & equity investors trading in the JSE derivatives market has the option to use margin while trading – which puts them at risk.

Using too much leverage to increase your position size also increases your exposure & risk. And this can multiply your losses, often higher than your original capital.

So, it is really important to avoid margin trading at all times, or use the leverage of no more than 1:5 if you really must.

Obsess too much with your current market position

Many new investors have a habit of looking at their portfolio again & again – especially when the market is going against them. This often results in panic & wrong decisions.

Long term investors shouldn’t obsess too much over the current market situation as it does not help. If you are investing in an asset with a long-term view – then it is best to not look too often at your portfolio.

Think about – why you decided to invest in that asset & what changed overtime that the asset is no longer investable. Ex: If you invested in company A – that has strong fundamentals, good future projects, growth perspective & solid growth over many years, then think would the current situation affect the company in the longer term. If not – then stick to your plan & don’t let every short-term market movement affect your decision.

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