When the markets were rosy, the smart money was buying and selling stocks; now that the market is down, many investors are sitting on the sidelines. What’s going on?
The Federal Reserve has cut rates four times since July and is working to reduce borrowing costs for consumers and businesses. The main effect of the Fed’s rate cuts is to make money cheaper for corporations and to encourage them to expand their businesses. In other words, lower rates mean a win-win for the economy.
While the Fed’s actions may help spur an economic recovery, they haven’t come without cost. The central bank’s rate cuts have made it easier for some investors to take big money off the table and put it into cash. The exodus of money from the stock market to the safety of cash is known as flight to safety.
Flight To Safety
When the market drops by 10% or more, it’s often the case that some investors will feel the need to take a bit of a safety net. Short-term Treasury bills are usually a good choice because they’re fully guaranteed by the U.S. government. They’re also highly liquid, which means you can easily exchange them for cash.
What’s more, these secure, government-backed notes carry very little risk because their purchasers are highly unlikely to lose their money. As a result, long-term capital projects and investments in emerging markets like Brazil, Russia and Turkey have taken a bit of a hit, as much as 30%, according to some reports.
Playing With The Big Money
Even if you’re not put off by the idea of playing with big money, it’s still a good idea to hang on to your smaller investments. It’s one thing to see the market drop 10% in a day or two; it’s another thing to see it drop 30%, 50% or even 70% in a matter of weeks, months or even years.
When the markets are rising, the temptation is to sell a little bit of your winning investment to take a bigger win. This is known as playing with the big money. The idea is to make a small profit off a large investment. But if you sell too soon, you might miss out on even bigger gains down the road. Or, you could find yourself in a bigger loss. It’s all about knowing when and where to cash out.
Selling When Confident
A good time to sell is when you’re feeling confident. The reason for this is many investors make the mistake of selling stocks when they’re unsure of the direction of the market. In other words, they’re afraid to buy more when the market is heading down and are therefore afraid to sell when the market is heading up. This sort of investment behavior can expose you to unnecessary risk.
What you want to do is look for solid, long-term growth opportunities in emerging markets. Even better, you want to find a way to participate in multiple markets, both domestic and international. This way, you reduce your exposure to any one stock or market movement.
Bullish On The Economy, Bearish On The Market
It’s important to keep in mind that not all bad news is bad for the economy. In fact, there are many reasons why the economy may be in a state of decline. For example, a lack of consumer confidence and a falling housing market are often cited as causes for the current economic malaise. However, the stock market is another story. When the economy is struggling, fewer people have money to spend on new technologies and products. Thus, demand for existing products plummets, which in turn, makes it more difficult for companies to sell their goods.
As a result, the value of all companies declines, and shareholders are left with fewer shares, when compared to before the recession. So if you’re a shareholder, it doesn’t exactly feel like the economy is performing at its best. In fact, the opposite may be true.
Emerging markets provide a way to invest in large companies that are more stable than their counterparts in the U.S. In other words, investors don’t have to worry about a company’s performance during a downturn because the odds of them losing money are slim. Instead, they have to worry about whether or not the company will be able to turn things around in the event of an economic upswing. For example, if there’s a government-imposed cap on the amount of debt a company can take on, investment in emerging markets can become more difficult than it is in the U.S.
More Than Meets The Eye
Many investors are using several strategies to capture the full benefits from the current economic recovery. Inflation has reached record levels, making gold, the most popular safe haven for investors, more attractive. Inflation tends to do this, so whenever there’s a sharp rise in the cost of essential goods and services, people rush to buy gold as a means of protecting their hard-earned money.
But while gold’s price may inflate due to increased demand, its price against other currencies, known as the gold/dollar ratio, has declined. This shows that investors are driving the demand for the yellow metal and that the current rise in inflation may not last forever. As a result, investors who want to benefit from higher gold prices may want to consider short-selling the dollar.
The last thing anyone wants is a losing investment. But since we’re living in a world full of uncertainties, it’s sometimes difficult to know when to cut your losses and when to keep going. If you’re reading this, maybe you’re wondering whether or not to keep going, now that the market has taken a bit of a hit.
What we can tell you is this: stickwith it. The market will almost certainly rebound, and when it does, it will provide wonderful investment opportunities. What’s more, the more you participate in the market, the more you’ll learn. This knowledge will come in handy when the next market downturn arrives.