How you can make the most of recent volatile markets
As share prices lurched in the past couple of months, investors have again been left to wonder their best strategy in surging but increasingly volatile markets.
The common cry is: "Don't panic!" It's true that panic never helps but certainly urgent action - be it buying or selling - is often the prudent course. Doing nothing simply leaves you exposed to potential losses or blind to opportunity.
Go back to the premise of the stockmarket, or any market for that matter. Buy when prices are low, sell when they are high. That part is easy to understand.
The harder part is trying to interpret when markets are low or high.
But even here there are some good gauges. Look, for example, at how much a market has run since its clearly obvious previous low. In the case of the All Ordinaries index, you can see it around February 2016, when the world wondered about Greece's solvency and Europe's ability to cope.
Let's not even go to the peak of the market but to the beginning of this year to give you an idea. From its trough, the All Ordinaries jumped 28% in less than two years.
Given inflation is less than 2%, is that a big enough real return for you?
Then comes the next question to jump into any investor's mind: "If it keeps going, am I going to miss out?" True, you would miss out if the market kept going but remember you're looking for clues for lightening up your portfolio.
The stocks you should be looking to clear out are those that have made stellar returns in a very short time, plus any mistakes you have made that might be harder to get rid of in a downward market.
Another question that will no doubt pop into your head (as it pops into mine): "Where will I put the money to get a decent return if I don't put it in the markets?" Well, clearly the bank, paying 2% or 3%, is an option. The idea here is that money kept in reserve, protecting the capital, is better than dropping 10% or 15% in the markets.
Other options are to cut debt and save, paying the interest on any margin loans or even mortgages.
The problem is always timing and not knowing the future. Plenty of bearers of doom have been proven right in the long term but have been wrong in the short term to such an extent that investors would have deprived themselves of enormous opportunity while waiting for Armageddon.
The answer, as in the case of many professional active fund managers, is to run a relatively fluid portfolio. The key word is "active". Many people prefer a set-and-forget approach but if this is the case they should also be prepared to ride out periods when their investments will significantly underperform.
More active investors will not get out of the sharemarket altogether because of volatility or even heightened risk. What they will do is continually assess the risk inside their portfolio, especially those companies that have surprised them on the downside or have become overvalued because of hype in the market.
Those that have fallen might have done so for good reason (missed earnings guidelines, new competition, management mistakes) and may be culled as a matter of course.
Naturally, in the absence of mistakes, these companies might also represent great buying opportunities. But to come to that conclusion investors must weigh up more recent threats, including the growth of online disruption, weak consumer demand, the veracity of profit forecasts and the impact of free-trade agreements.
The bigger problem is that in volatile times companies that miss earnings guidance are punished hard by the markets, sometimes out of proportion to the magnitude of the announcement.
The final part of all this is the administration and time required to solve all these pieces of the puzzle. Too often people do nothing because it is too hard to do something.
Think about the process of selling and buying shares ... the potential tax you will pay, the brokerage fees. It's even worse if you're thinking of selling an investment property.
And so, too many people do nothing ... because it's easier. And that's why so many people are disappointed when sharemarkets fall. But they've done nothing. And they say, "I saw this coming." But still they did nothing.
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