Let’s imagine you’re at a busy traffic intersection, patiently waiting for the light to turn green. Eventually, it changes and just as you begin to move forward, the red light appears suddenly! “That was weird”, you think, after hitting the brakes. You slowly reverse back behind the line only to see the light quickly turn green and then red again. You might now be wary and uncertain about moving forward as you could cause an accident.

The traffic light you’re at is definitely broken, but the same can’t be said about the stock market, which behaves in a similar fashion. The uncertainty regarding the severity and duration of Covid-19 has caused global markets around the world to become more volatile.

Just like the broken traffic light, one day the markets are green (up) and the next they are red (down) which is unsettling and plays with our emotions as investors. Periods like this are scattered throughout history and do occur from time to time.

What should I do?
It would be wise to consider the possibility of a market downturn in the future like the one we are currently experiencing. So, when you consider investing it’s important to place your hard-earned cash into investments that suit your risk profile. Your risk profile is an indication of the amount of volatility* you should take on.

To assess your risk profile, take some time to think about your willingness and ability to take on risk. How would a 25%, or even a 40%, drop in the value of your investments make you feel? If your answer is anything close to terrible, you may want to invest in a more balanced, less-risky fund as supposed to a high equity fund. The price of equities tends to move very erratically. 

I need to withdraw my money soon, what should I do?
You should never invest an amount knowing you will need it in the near future to cover an expense. It’s important to discuss your risk profile with your financial advisor or identify how risky the Unit Trust, Mutual Fund or ETF you’ve invested in actually is.

These funds are required to provide this information online. You should pay particular attention to the risk profile of the fund, its investment horizon, its lowest annual performance and its maximum drawdown* to date.   

Align your investments to your life stage
Even in times when markets aren’t moving erratically, your investment must be aligned to where you’re going in life and to the stage of life you’re in. As we get older and our financial standing changes, so does our risk profile. Individuals in their 20’s can expose themselves to more risk as opposed to retirees who need their money to be guaranteed in the next few years.

Investing is often a long-term game. You’re essentially buying parts of companies that will hopefully appreciate in value over the long-term. Try to refrain from watching your investments like a hawk as you’ll be strapping yourself in on an emotional rollercoaster ride. This could lead you to potentially buying in and out of investments at the wrong times, which could be costly.

🔤 Words of the Week*

volatility – a measure of variation in the price of an asset (e.g. shares) over a period of time. Generally, the higher the volatility, the riskier the asset.

maximum drawdown – in a financial portfolio context, it measures the difference between the portfolio’s maximum point and its lowest point. It is the movement of the portfolio from the greatest point to its lowest point.

Ross Reid

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Ross has joined the 22seven team as a Slice and Blog writer. He's a keen financial writer who enjoys demystifying the world of finance. Ross is currently pursuing the CFA designation and has a background in Real Estate finance and investment. In his spare time, he can usually be found reading, running or on the football field.
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