How to manage risks when in investing in a down share market
Three things have combined to cause a volatile drop in this particular share market – but it could be a good opportunity for would-be investors.
Tech companies have been battered in the recent market ups and downs. Covid variants, interest rate rises on the cards, and the Russian conflict all have investors nervous.
As a result, we’ve seen the share market on a wild ride – and tech shares have been one of the investments that have copped it hardest.
The tech heavy US Nasdaq market alone is down 14.42 per cent since the end of 2021, reflecting a loss for investors of over $US2 trillion ($A2.7 trillion). But on the flip side of this loss comes opportunity.
Many would-be investors in 2021 were looking at share prices well above Covid lows and questioning whether the value was there. But with the recent cooling of prices, investors today have an opportunity to get in at prices well below those seen in 2021 – and benefit as the market grows.
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Most people think you need a huge amount of money to get started investing, but consider this example – if you started investing with no savings and invested $1000 per month, your money would have turned into $180k, $600k, $1.56m, or $3.84m over the last 10, 20, 30, or 40 years respectively by investing into the Australian share market (ASX All Ordinaries Index via the ASX long term investing report).
As you can see from these numbers, the combination of time and money is a beautiful thing. The best time to take action was always 10 years ago, but the second best time is today.
But what’s the risk?
Before you rush into investing in a down sharemarket, you need to understand where your risk is coming from. Risk is not a bad thing, and in fact it’s what actually makes you money when you invest.
The key is understanding where your risk is coming from and which risks are right for you.
There are some general risks you face as an investor, but in a down market there are a few key risks you should carefully consider and manage.
Probably the most relevant when investing in a down market is volatility risk, driven by the ups and downs of the share market.
If you’re buying shares hoping to make a quick buck, these risks are increased significantly.
Nobody has a crystal ball, so while I’m confident that over the long term the sharemarket will be higher than it is today, what I don’t know is where prices will be next week, next month, or a year from now.
This means that if you’re investing with a short term time horizon, it’s possible your investments will be down at the time you’d ideally like to exit.
You always have the option of holding your investments for longer, and time de-risks almost all risk, so as long as you choose good investments today you should be well placed for future growth. But you should think carefully before investing any money you might need (or even really want) to access in the shorter term.
Planning your investments
The most common mistake I see from investors is making choices in isolation. This happens when you look at whether a good investment is ‘good’ in absolute terms, and don’t consider how it fits in with your bigger picture money plans.
If you want to be truly money smart, you should be aiming to have all the different elements of your money working together and heading in the same direction. This means that your investment plan should fit in with the lifestyle goals you have in the coming years, whether it’s starting a family, business, changes to your career, or where and how you’re living and working.
When you take the time to get this right, you’ll ensure your investment is not just something that will grow, but that it will be something that will support what you’re actually trying to achieve from your money.
Investing is a key building block on your pathway to financial security and freedom, so you have to get it right.
And with the recent market wobbles, now is the time for smart investors to think about their strategy and how they can take advantage of the current market conditions. But it’s not without risk, so take the time to cover your bases.
Understand and manage your risk, don’t fall into the short term thinking trap, and get clear on your plan to have all the elements of your money working together and heading in the same direction. This way you’ll be set to profit when you invest and get the results you’re looking for.
Ben Nash is a finance expert commentator, podcaster, financial advisor and founder of Pivot Wealth, and Author of the Amazon Best Selling Book ‘Get Unstuck: Your guide to creating a life not limited by money’.
Ben is putting on a series of free money education events in 2022 to help you get on the front financial foot. You can check out all the details and book your place here.
Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.