How to look beyond sharemarket brain snaps
Volatility on share markets is extreme and recent surges seem crazy as COVID-19 continues to crush economies. Sharp falls have reversed the trend, but there are four steps you must take.
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You could be forgiven for thinking sharemarkets have lost the plot.
Aussie stocks surged 15 per cent in a month, right as the Federal Government confirmed we were in our first recession in 29 years, before plunging sharply late last week.
A seven-day winning streak for our market ended on Thursday, but several stocks are still trading near record highs, as if investors think COVID-19 doesn’t exist.
It’s even weirder in the US, where the NASDAQ Composite Index – which tracks tech giants including Apple, Microsoft, Amazon, Alphabet (Google’s owner) and Facebook – surged to a record high last week before the sell-offs.
And that’s in a country that is in much worse economic shape than Australia, is falling apart socially, and has a President who … well … don’t get me started on that.
It looked like a sharemarket brain snap before commonsense appeared to make a comeback. Many market analysts believe further heavy falls are on the way.
So why do we see disconnects between markets and reality, and how do you deal with them?
1. UNDERSTAND THE REASONS
Sharemarkets are forward-looking beasts. Traders try to predict things a year or so from now, and they buy and sell stocks accordingly. Recent rises reflect a more positive outlook as economies show early signs of improving as they gradually get the coronavirus under control.
Another reason for sharemarket strength is that for many it’s the best of a bad bunch. Cash deposits pay almost nothing, bonds are low too, and property look shaky.
Most shares pay dividends, even though some have been cut or suspended.
Many market traders joined the sell-off in March and were recently buying again after being caught with their pants down by the sharp recovery.
2. DO YOUR HOMEWORK
Before buying or selling shares, research a company and its profit outlook. Shares are simply a small slices of companies, and if the company grows profits, its share price will rise over time.
There’s plenty of information on the internet to help you study, and online trading platforms offer users charts and tools to build a portfolio.
If it’s all too confusing, seek professional advice.
3. AVOID KNEE-JERK REACTIONS
Going all-in to buy shares after a strong rebound is just like panic-selling them at the bottom of a collapse – you’ll probably lose money.
Successful investors ride out the wild swings in sharemarkets, buying some stocks at a discount during downturns and taking some profits when prices soar. This smooths out their investment returns and delivers long-term growth.
4. STICK TO YOUR PLAN
If you’re a long-term investor gradually building a portfolio, it won’t matter whether the market sinks or soars 20 per cent from here, because you won’t be needing your money yet.
Shareholders shouldn’t invest anything they’ll need to withdraw within five or seven years. And even that could be too soon.
However, over the really long term – several decades, shares have been one of the strongest places to park your money.
Originally published as How to look beyond sharemarket brain snaps