In this, the second part of our journey, the intention was to shed some light upon some of the vagaries of stock markets and dissect a few of the urban myths surrounding investments in shares.
Right on cue, at the end of August China pulled the rug from underneath global investors’ feet. Once more, the world witnessed a live demonstration of how shares can turn anyone’s financial world upside down in one day.
Whether you are in or out of stock markets, the cold truth of buying shares is that it satisfies access to investments. These investments are almost as readily available as cash within a daily market place across the globe. Granted, shares do not provide the equivalent low levels of risk as cash. However, they do hold potential for stellar returns. Over the longer term, shares should outclass the rise and fall of interest rates and inflation that normally depreciate your cash savings, although this is not guaranteed.
A new investor’s sensible questions should include one along the lines of why would they wish to expose themselves to a China-type crisis and lose all they have earned in any given day?
Well, they don’t have to because of two key factors that are important to understand before you take on the stock markets and win – risk and diversification.
It is instinctive for an individual as they grow to develop their understanding of any perception of risk through experience. Perhaps after a few online tuition classes or visits to the library, you may gain the basic knowledge of how each and every financial nuance of risk comes about and what are the possible outcomes.
The old adage “when America sneezes, the world catches a cold” still applies, and now China has added themselves to this panic warning. If your risk and diversification strategies have already been well established, in theory, you should be in a state of rational calm to prepare you for these moments and for what comes after.
This brings us into the realm of another science referred to as behavioural finance. I will just touch on this by explaining that behavioural finance seeks to combine behavioural and cognitive psychological theory with conventional economics and finance to provide explanations for why people make irrational financial decisions. Proposing theories to explain stock market anomalies and market outcomes are why some of the investment community will tend to hold when markets are free-falling. This does not guarantee success, but if you do the maths, an overnight loss of 20% after shares are sold off leaves the investor with no other choice than to achieve a minimum return of 25% to recover.
Why not check the figures yourself by taking 20 off 100 and ask yourself what percentage of 80 will take you back up to 100 again?
Again, investments were never meant to be straight forward, as any outcome is a possibility where “What if….?” is never eradicated entirely. With the risk assessment procedures and diversification methodology reflected across your investments, your outlook and desired destination should weather any Greek, Chinese or other oncoming storm.
This article is intended to provide a general review of certain topics and its purpose is to inform but NOT to recommend or support any specific investments or course of action.
Past performance is not necessarily a guide to the future. You may not get back the full amount of your investment.
Raoul Ruiz Martinez
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Raoul Ruiz Martinez is a resident and independent consultant for Finesco Financial Services Ltd., Glasgow and advises clients on private financial matters in both the UK and throughout Europe under the MiFID regulation. Finesco Financial Services Ltd is authorised and regulated by the Financial Conduct Authority (FCA). Some of the services provided are not regulated by the FCA because they are not included within the Financial Services and Markets Act 2000. | 289 561 333
