Make a Financial Plan
A sound financial plan is a strategy that takes into account your current financial situation and aligns it with your overall financial goals. A financial plan doesn’t simply mean investing. Your financial plan needs to have clear goals. Make an estimate of the kind of returns that you would need from your investments to achieve your financial goals. Take into account the kind of risk that you can bear in case the investment goes wrong. Do not invest in high-risk portfolios that promise high returns unless you have the appetite for such risk. Once you have calculated how much you want to invest, review the different investment strategies & options that are available, that align with your goals and risk-taking ability. Select a strategy that works for you. Your financial plan should be made taking into consideration several factors such as the purpose of investing, the time-period of your investments, and projected inflation in the country during that period.
Review Your Budget
The most critical aspect of your financial plan is your budget. A budget is a breakdown of your earnings, savings, and expenditure. While making your budget, you should calculate your monthly expenditure, how much you need for essentials, your rent expenditure, how much you need for emergencies, your children’s education, loan repayments, insurance premiums, and any other expenses. Once you have a budget in place, you are in a better position to know how much you can afford to invest and the level of risk that you can bear. As a rule of thumb, you should only invest the money that you can afford to lose. If you can’t lose any of your capital but still want to invest, then consider highly safe options such as fixed deposits at banks.
Look for Opportunities
Depending on your investment strategy, conduct market research to spot the best opportunities. If you’re looking to invest in equities, check the sectors that are performing & expected to do well during the current market slowdown. Review the fundamentals of top companies in these sectors to judge whether they will continue to grow long-term. For example, pharmaceuticals and FMCGs are currently outperforming other sectors, due to the rush for essentials. Are these stocks available at a good discounted price? Look into the dividends they have distributed in the last 5 years and the earnings per share (EPS). Currently, the Johannesburg Stock Exchange has lost over R4.5 trillion in market capitalisation since the beginning of the year. This is a good opportunity since most blue-chip companies are trading at a severe discount of around thirty per cent (compared to 52-week high). Try to invest in safe blue-chip companies rather than high-risk stocks in difficult times. If you’re looking to trade in currencies and derivatives, then this may be a good time since the market is experiencing the highest levels of volatility in nearly 5 years. Currencies that have been relatively stable for many years without much movements such as the EUR/USD are now experiencing high volatility. While currencies of emerging economies like Rand (ZAR), Brazilian Real, Russin Ruble, Nigerian Naira have depreciated considerably (as high as 30% since the beginning of the year), due to a rush towards risk aversion. But analysts say that worst might be over for Rand & expect it to rebound by the end of the year, which might present more opportunities for currency traders. Many global forex brokers are now reporting as high as 200-400% increase in trading volume due to growth in currency speculation. If you are a currency day trader focusing on speculation & short-term gains, this may be a good time to take advantage of the volatility. FX pairs can be traded at regulated forex brokers or through an exchange like JSE, which offers it as Futures & Options derivative instrument.
For Commodity traders: Prices of commodities like gold and silver may rise as people look for a safe investment. Gold has been viewed in the past as a safe investment during uncertain times. The price of WTI oil has fallen considerably from close to $60 at the start of the year to as low as $19 per barrel due to OPEC+ price wars due to supply agreement issues from the falling oil demand during this crisis. The oil price could rise in the short term if there is some deal to slash output, and in the long term when the demand for oil rises again once the global economies open up. Commodities including – Oil, Gold & Silver are mostly traded as derivatives at major exchanges like JSE or at CFD brokers. Investing in derivatives like – Commodities & Forex may carry much higher risk and you should only invest or trade in such products if you are comfortable with the risks these instruments carry and understand the underlying trading fundamentals.
Focus on Long-Term Goals
If you are investing in uncertain times, it is best to look at your long-term goals. Short term gains may be limited in a receding volatile market, but that doesn’t mean that your investments do not have long term potential. Do not judge your investments by their current status since they may be undervalued or underperforming due to market turbulence. But at the same time, be wise to understand the risk of your investment & how does the current situation affect its long term outlook. When seeking long-term growth, consider your investment strategy. Are you looking to make money from stock dividends in blue-chip high EPS companies? Are you looking to invest in high-growth companies that are poised for high valuations but are not necessarily concerned about short term profitability? Or do you want to make short term gains by speculating on the current volatility of the stock & other markets? When deciding on your investments look at how they have performed in the last three to five years as this may give you a better idea of the kind of future performance you can expect. Check the 3-5 year CAGR (or the Compound Annual Growth Rate) of your investments.
Remember that the fundamentals of a good company with sound management do not change depending on short-term market volatility. You should rely on the fundamentals to make your investment choices. A good investment strategy would be to invest in companies that are currently undervalued but have strong fundamentals and scope for growth.
Don’t Rely on the Advice of “Experts” and Don’t Panic
Instead of relying on specific advice from experts on investment choices, you should seek to learn how to judge fundamentals and the technical aspects of trading. Solely investing based on recommendation or expert advice is notorious for being misleading and it is better to rely on your own informed judgment. Due to uncertainty in the market, the valuations and prices of several investments are abnormal. Do not buy into the short-lived panic and exercise cool judgment to make your decisions. The current market volatility is an excellent opportunity for day traders, especially in currency markets. Also, if you are an equity investor, remember that strong fundamentals will win over short-term volatility in the long run.
Conduct Proper Risk Management and Assessment
Every type of investment carries its own risk profile. Study the kinds of risk that are involved with each type of investment and assess the risk of your overall portfolio. Remember, do not invest more money than you can afford to lose. Every investment carries a certain amount of risk and do not trust “guaranteed profits”. You should err on the side of caution and only make investments that you understand. Investing in uncertain times may carry more risk but they also carry greater opportunity for better price discovery. There is a greater possibility of finding good long-term investments at lower prices. Instead of staying off investments during such times, it is advisable to spend more time studying the markets and investing cautiously.