Investing is risky business. Well, that’s what many people think, anyway. When you invest your money into stocks, bonds, real estate or gold, you are taking on risk.
You might ask yourself: What happens if prices go down?
Well, this is downside risk. And you’re taking it on with any long (buy) position you have. But how would you know for sure that an investment will go up?
We are now in a time of grave uncertainty. All eyes are on the US Federal Reserve. Investors are waiting to see what Janet Yellen, head of the Fed, will say about the direction of interest rates.
The implications of Yellen’s words, and the Fed’s decision, could gravely affect share markets and other asset prices. So how do you hedge your investments amid this storm of uncertainty?
In David Sarna’s book History of Greed, he explains:
‘We all have some larceny in us. We buy securities because we think we know someone or something others don’t. I don’t think anyone can consistently outperform the S&P 500 without assuming greater than market risk.’
Market risk certainly does play havoc in times of uncertainty among fearful investors. However, professional, proactive investors, I believe, don’t concern themselves over the general trend of the market.
Instead they ask themselves, ‘How can I profit from this situation?’ The well-worn phrase, ‘Don’t let a good crisis go to waste’ refers not just to politicians, but investors too.
If investors are running scared, having no clue what to do with their money, they’ll usually jump out of the market. Yet this is the quickest way to lose your money and learn nothing in the process. Instead of sitting on the sidelines, why not try to profit?
Stocks will likely drop if investors rush out of the market; so it could be your time to pick up some bargains!
Granted, it’s not that easy. But even if you end up in a losing position, you’ll learn something for next time you enter the market. Having this winning attitude is hugely important for your future success. If you approach every crisis by telling yourself ‘I’ll make money’ or ‘I’ll learn an important lesson,’ then you’re more likely to profit when the market turns for the worse in the future.
Of course, you’ll have to be responsible when entering the market. Only trade what you’re willing to lose; and you might even want to think about buying a few put options. These allow you to sell out at a pre-determined price and date.
Janet Yellen is expected to speak this Saturday morning AEST. The Fed has said that they plan to raise rates, implying prolonged growth for the US economy, this year. However, they are yet to do so, and time is winding down.
Everyone is waiting to hear what Yellen has to say. Will rates in fact rise in 2016? Or will they continue to drop?
The Aussie market, the S&P/ASX 200, has been quiet ahead of Yellen’s speech. Company results have done little other than to push the market slightly down. All eyes are instead focused on the Fed’s movements. In fact, things have been so quiet within the market that many believe things are shaping up for a big move.
Great performing stocks, no matter what the environment
With the possibility of a big market move, investors are looking for shares that will ‘weather’ the storm. Just to give you an idea of what I mean, the Australian Financial Review just highlighted 14 stocks that have performed even when the market hasn’t.
Among the 14 are Ansell Ltd [ASX:ANN], Amcor Ltd [ASX:AMC], Domino’s Pizza Enterprise Ltd [ASX:DMP] and Technology One Ltd [ASX:TNE].
These stocks were the ones considered to stand up in an environment of low interest rates, wild swings in global currencies, and all different types of economic growth. The graph below shows the performances of the four stocks above compared to the S&P/ASX 200 (green line).
Source: Google Finance
So why have these stocks been able climb when others haven’t? For starters, it isn’t due to just one factor. Companies that perform well in the market usually perform well on the balance sheet, income statement and cash flow statement. It’s also their ability to grow and their prospects for the future.
So if you want to find stocks that could ‘weather’ the storm, you might first want to look at companies who are growing revenues, increasing profits and reinvesting in their own business.
Of course, there is no guarantee you’ll pick winners all the time. However, it’s a good start if you want to add some potentially reliable earners to your portfolio.
Junior Analyst, Money Morning
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