As counter-intuitive as it sounds, the prevailing volatile economic environment can actually be a very good time to invest your money, especially if you don't have much. Investors can really thrive in a time of crisis for new money-making opportunities often present themselves because high inflation, rising interest rates. Further, recession fears tend to drive prices in the market lower. In times of uncertainty, rather than waiting for the market to rebound, as many people may be tempted to do, you should consider the opposite. If you wait to invest opting to wait until the markets improve you would have missed a known window where millionaires are created. Timing the market is not typically a good idea and no one can predict the future but blue chip stocks are considerably low at this time. At the very least you should be averaging down your cost.
First things first
To understand why volatility in the market can be a positive for you in your quest to invest, let's start at the beginning. What is volatility? Volatility is the price changes a security (a financial instrument with monetary value that is able to be traded) can experience over a period of time. All investments carry inherent risk; some would argue that not investing comes with its own risk. The thought of risk often paralyses potential investors with thoughts of "Suppose I take my hard-earned money ("my likkle much") and buy shares in a company and next week the price drops.".
Beginner and conservative investors tend to be nervous about risk; some even more so than others. They might panic and decide to withdraw their investment out of fear that potential gains might be erased. However, a seasoned investor understands investing is generally a medium to long game. They also understand investing requires patience. Each trade carries with it the risk of failure but also of success. Securities go up; securities go down. But the majority will go up again. That's simply the way investment works. A good company is a good company and though the environment can change, good companies with strong management will weather volatility.
Don't fear volatility
Risk aversion isn't something that's being mocked or looked down on here. It is never wise to make money moves you aren't comfortable with. The fact is that there is an emotional component that comes with investing and matters of finance; even more so the pain suffered from loss. Studies have constantly shown that loss is more acutely felt than the joy of gain. Still, my advice to a beginner investor is, you should not put all your eggs in one basket. As they say, man plans and God wipes. Your security through no fault of your own, could make an unforeseen U-turn and result in a loss. This is where diversification comes in. Say you have $20,000 to invest; it is not wise put it all in one asset. For example, do not buy shares in one company; consider investing in more than one company. Still, in the eventuality that the entire market takes a tumble (this is really a golden opportunity that we will explore further in future articles), there are other investment options such as fixed income and money market instruments. Bonds and repos are just a few of the alternatives. Diversification of your investment portfolio is how you mitigate risk. Think of your portfolio like a market basket; you need some tomatoes, cucumbers, bananas, lettuce, etc. They all reach peak ripeness at different times and won't spoil all at once.
Investing on a small budget
We have been deconstructing the myth that you have to be rich to invest, which ties in with the other myth that times of market volatility are the worst times to invest, especially when your funds are tight. Here are two often overlooked options for people with not that much money to invest.
IPOs: An initial public offering occurs when a company not listed on the stock exchange decides it wants to raise additional funds for expansion by selling shares or securities to members of the public. The company can now list on the stock exchange as a publicly traded one and you, are now a shareholder entitled to a piece of its profits.
Bonds or a Bond Fund: These are well-suited for the investor who have access to a bit more money. For example, you have around $250,000 parked in an account that isn' t a high-yield on a bond or bond fund is an option. When you purchase a bond you have effectively given a loan to the issuer; think of a bond as an IOU. How it works is this: A company or the government, known as the issuer, rather than raising money from a bank loan, will seek to raise the money from investors willing to lend them that money for an agreed period of time at a specified rate of interest.
What are your goals: long-term capital gain or current income? There's an investment opportunity that will be ideal for you whatever your financial status. Remember, every day you delay starting your investment journey is a day more you delay achieving your financial goals.
Correction: Last week's article, "Ways to invest without much money â€” P1", incorrectly stated that the minimum units that an individual can buy of a publicly listed company on the Jamaica Stock Exchange was 100. The minimum amount of units is in fact 1.