The investment landscape is a difficult one to assess at the best of times. The bull markets that gripped Wall Street and global indices lasted for quite some time. That it recently endured a slight correction will serve to snap traders and investors back to reality. One can never afford to rest on one’s laurels for too long in the financial markets. Stocks, bonds, Forex, indices and other asset categories are subject to the whimsical behaviour of seemingly obscure market forces. Perhaps the biggest driver of volatility in the financial markets is speculative sentiment. When an idea gains traction with institutional traders and investors, it quickly spreads like wildfire throughout the markets. It doesn’t take long for sentiment to jump across the Atlantic, and the Pacific and have a domino effect on global bourses.
If speculative activity is predicated on the fears and hopes of traders, it nullifies the impact of fundamental economic factors on the markets. Therein lies a misconception. Short-term price corrections through speculative activity do not alter the fundamental state of the economy. In other words, a selloff of such as the one we saw in February in equities markets cannot indefinitely undermine the fundamental strength of US manufacturing and services activity. However, the jolt is big enough to raise concerns on Wall Street and Main Street. Investors are scared of price corrections. Traders have no appetite for letting a lucrative opportunity pass them by. Olsson Capital trading professional, Hamish Martin believes that there is a lesson to be learned from the whipsaw motions of financial markets:
“When markets are rising, we are all rejoicing. This linear progression is tied to our innate understanding of appreciation in asset prices. When an asset such as a stock rises in value, we celebrate and purchase more stocks in the hope that they too will appreciate. However, when markets start to backtrack we tend to panic. This is human nature. We fear that we will lose all the gains we have made and want to bail out before it’s too late. It’s at this precise juncture that you should stand back, put your hands on your hips and observe. Don’t be too eager to sell when a mini correction is taking root. The better alternative is to buy on the dip, and set stop losses to safeguard your profits, but not in a haphazard way.
It is strongly advised that you seek alternative investment hedges to protect your equities. For example, gold ETFs, physical gold bullion, fixed-interest-bearing investments, and even a larger allocation of cash in hand can serve you well during volatile trading sessions. The last thing you want to do is make emotionally charged decisions about your financial future. Your portfolio actually says a lot more about your character than you believe. Risk takers are heavily invested in tech stocks, while those who play it safe will balance their financial portfolios better. For every downward revision in prices, there is an asset category that can prop up your portfolio’s value. Derivatives trading is one such approach that you can adopt, in addition to safe-haven asset such as gold.”
Should You Take Risks in the Markets?
Your appetite for risk will determine your precise allocation of financial assets. Risk seekers prefer aggressive growth stocks, while risk-averse individuals will opt for funds that track the performance of entire sectors, or indices in the markets. Anyone who wants to generate profits through the financial markets will inevitably take risks. There is no reward for those who don’t take risks. However, you can balance your portfolio to minimize your exposure to many powerful market forces.