Investors should always be in a position to answer the following questions: what political and economic events are on the horizon, and how are they likely to affect my investment portfolio? In the current environment, this has never been truer argues one trading expert. Hers’s how to prepare.
If the events we have seen so far this year are any indication of what the future has in store, investors and traders are in for an eventful 2020. The US-China trade war will drastically impact the price of commodities, while the UK’s withdrawal from the EU will be constantly on the minds of those investing in the European stock market.
Financial markets are fast-moving entities susceptible to sudden rises, shocks and crashes. As such, managing an investment portfolio in volatile periods can, at times, seem overwhelming. Indeed, the idea that investors and traders need to stay abreast of all the major markets, indices, and political events, and be able to adjust their financial portfolios accordingly, may sound like an impossible task.
However, there are two helpful pieces of advice that all investors should heed to accomplish such an undertaking, says Giles Coghlan, Chief Currency Analyst, HYCM, an online provider of forex and Contracts for Difference (CFDs) trading services.
Act with your head, not your heart
When confronted with a sudden market shock, there is a tendency for investors to panic, he notes. “Suddenly seeing the market value of your investment drop significantly is confronting. Yet any experienced trader will tell you that such an experience is inevitable when engaging with the financial markets. That’s why it is advisable to always make trades and investment decisions with a level head.”
A desire to react in the moment to the trading environment can be compelling, unexpected and catch investors by surprise, notes Coghlan. Traders face a constant battle with self-control – and a great deal of trading is about controlling strong urges to trade, he adds. “At times, we need to prevent the strong urges that we have to trade, from influencing us.”
In order to evaluate that desire to trade, it is necessary to pause. By inserting a delay into that instant reactive desire, traders can grow in self-control and discipline, believes Coghlan. “Have you ever put on a trade, and then removed it, only to put it back on ten minutes later? You are possibly oscillating between reacting and responding in that moment. We don’t want to just be reacting to the markets, we want to be responding. And the central pillar of responding well is paying attention.”
Ask what your financial portfolio is aiming to achieve: are you after long-term growth, or are you prepared to take high risks for high returns? By answering such questions, a framework can be established to guide your financial goals and day-to-day investment decisions, he says. “It helps determine what type of investor you are, and the amount of risk exposure that is manageable for your portfolio.”
At a simplistic level, there is a sliding scale: high risk, high return at one end; low risk, low return at the other. Both have their relative strengths and limitations when viewed in the abstract. However, determining what type of investor you are will help inform future investment decisions when confronted with political and economic shocks that could affect your portfolio.
Look to the past for guidance, not answers
At first glance, what does the current coronavirus outbreak have to do with the performance of the Asian stock market? “Quite a lot actually,” says Coghlan. “While neither may seem to have a direct connection, the reality is that global events such as this will always shape the performance of commodities, stocks and shares.”
It’s still too early to determine the full extent to which this outbreak will affect the financial markets. However, looking at how stock markets have performed during similar epidemics offers a useful glimpse into what the future might hold, he says.
For example, the severe acute respiratory syndrome (SARS) outbreak in Asia in the 2000s was reported to have caused a US$25bn dent in the Chinese economy. And when it came to commodities, the price of oil was reported to have dropped by 20%. However, there was relatively little impact on the US stock market.
“Epidemics can have market consequences and lead to market risk,” notes Coghlan. “Based on what was seen during the SARS outbreak, it is likely we could see the same trends transpiring.” Take oil: from 20th January to 25th January this year, the price of Brent crude dropped by 6% to US$62 a barrel – its lowest price since early December. There are two key factors influencing oil at the moment. A surplus of supply that OPEC is trying to manage through agreed cuts, and a drop in anticipated demand due to the coronavirus outbreak (with travel restricted, air flights cancelled, the extension of the Chinese New Year and construction cutbacks, it is evident why oil prices are falling).
This simple comparison demonstrates the usefulness of available knowledge when looking at how a market has performed during a past event and applying those lessons to a similar situation to gain some insight into what the future could hold.
But, states Coghlan, every investor should remember that nothing is ever certain when it comes to trading. “While the past may offer some useful lessons, it should also be viewed within the context of the current political and economic climate.”
Be ready for future shocks
Mastering the complex nature of different financial markets is not simply about watching the fluctuating prices of assets. It’s also about understanding the historical performance of different markets, analysing previous trends, and using all this as a guide to managing investments during sudden political and economic shocks.
What’s more, every investment decision or trade needs to be part of a bigger strategy, with goals, returns and risk exposures all clearly defined, says Coghlan. “Doing this ensures that regardless of what shocks may rattle the markets in 2020, investors and traders are already in a position to manage their interests.”