If you’re an avid follower of the market, you’ll know this year has been a bit rocky. At the end of 2015, analysts were calling for a stock market rebound in 2016.
The S&P/ASX 200 ended the year down 11.4% from its high in March. Stocks finished the year at 5295 points, which isn’t a disaster. But the performance of the market in 2015 left a lot to be desired.
As we entered 2016, the market couldn’t shake its decline from 2015. The ASX 200 continued to drop. And in February the market reached a low of 4765 points. It put the market 20.3% down from its high in 2015. At the time, picking stocks was a nightmare.
Not just for retail investors, but institutional investors as well. Hedge funds and money managers were lost, like most. But all things must come to an end. The down days of the market didn’t last forever.
The ASX 200 has now climbed 16.2% from its low in February. There is nothing but good times ahead…one would hope. But if you had invested in an index fund tracking the ASX 200 since 2015, it wouldn’t have been worth your time. You’d be far better off putting that money in the bank.
From 2 January to now, you’d only make a 2.3% return on your investment. This means that, if you put $30,000 into an ASX 200 index fund, you’d only receive $690 for your investment.
And if you had put your money in just a year ago, you’d have even less than that. The market is actually down 0.65% over the past year. So you would have lost $195 of your original $30,000 investment.
This is why timing and picking the right investment is so important. A set and forget type of trading style doesn’t work all the time. So instead of placing you money somewhere and forgetting about it, you need to think.
If your money can work harder for you somewhere else, then that’s where you should put it. I’m not urging you to become a day trader. But evaluating your position each week or month won’t hurt you either.
In fact, it might help you earn far higher returns than you’re earning right now.
With returns comes risk
If you’re unaware, the ASX 200 includes the top 200 Australian companies by market capitalisation.
A large reason why the ASX 200 is down is because of the recent global uncertainty.
Large companies have the disadvantage of being scrutinised far more than many stocks in the market. Sure, blue chips are regarded as strong, dividend-paying stocks. However, the numbers speak for themselves. If investors are beating down large companies, why throw your money in with their lot?
Investing in large companies also makes it extremely hard to double or triple your initial investment. And it’s simply because their share price won’t realistically double. It might in the long run. But waiting 30 years to enjoy your spoils is not my idea of living life. And, over the past year, it seems that the average blue-chip on the ASX won’t even go up.
That’s why many investors have chosen to invest in small cap stocks. They are liquid enough to get in and out quickly. And they offer the potential to double or triple your investment.
What’s also amazing is how small cap stocks have performed lately. The S&P/ASX Small Ords has actually outperformed the ASX 200 in the past year.
While large companies seem to be more affected by market turmoil, small caps are soldiering on.
If you had invested in the Small Ords over the past year, you’d be sitting on returns of 17.23%. That means the average returns of small caps have beaten the market by 16.58%.
To use a monetary example, a $30,000 investment into the Small Ords a year ago would have put $5,169 in your bank account. Definitely better than putting your money into a savings account. And far better than losing $195.
Source: Google Finance
And what’s even more exciting is that this is just the index. If you pick the right small cap stocks, you could be realistically adding triple-digit returns to your portfolio.
Invest in safety
As I mentioned before, we’ve had a bit of a rocky year. Low oil prices, Brexit and a lack of demand from China have added to the uncertainty. Central banks are also adding fuel to the fire through their inaction.
The Federal Reserve has said that they will raise interest rates twice this year. Yet they have yet to do so. And we are already more than half way through this year.
All this uncertainty has encouraged a lot of investors to jump into perceived ‘safer’ assets. One of which is gold. This year gold has climbed 24.1%. Its rise is leading many to believe there will be more uncertainty ahead.
But before you rush out and buy physical gold, why not buy gold stocks? Instead of 24% returns, some gold stocks on the ASX have returned more than 500% to investors.
The graph below shows a few gold miners who are listed on the ASX. As you can see, investing in any of these miners, other than Kingsgate Consolidated [ASX:KCN], would have made you far more money than investing in physical gold.
Source: Google Finance
It’s not just about knowing what a good investment is. You need to think a little deeper. You need to think how you could supercharge your returns. But, again, with enormous returns, there will be considerable risks associated.
Yet if you only trade what you’re willing to lose, then you could be making money whether the markets go up or down.
Junior Analyst, Money Morning
PS: Investing in small-cap stocks can be extremely attractive. As long as you understand the risks involved, tripling your money might only be a trade away.
Earning more than 50% of your initial investment is hard to do when investing in blue-chips. But Money Morning’s small-cap specialist, Sam Volkering, can show you how to make 50% returns in one day.
In Sam’s report, ‘Top Three Aussie Small-Cap Stocks’, Sam will give you the inside scoop on the three best small-caps on the ASX.
If you don’t have huge amounts of capital to work with, investing in small-caps could be perfect for you. To get your free copy of Sam’s report, click here.