6 Factors to Consider when the Share Market is Volatile
1. Review your goals.
Why did you make this investment? What was the overriding objective? For example, are you a 40 year old investing for your retirement or saving for a deposit for your home. If you are saving for a deposit for your home in the next 12 to 18 months you require your portfolio to be more conservative with mainly blue chip value stock. If you are planning for your retirement in 20 years time you can afford to invest in higher growth stocks with longer term growth potential.
Be mindful of the debt level of the companies that you have invested in. The highly geared or leveraged companies tend to perform the worst in volatile times than companies with lower leverage ratios. In tough times it is generally difficult to reduce debt levels.
3. Assess the profitability of the company.
If the company you have invested in constantly and periodically makes a profit and has positive cash flow then it is more than likely going to weather the volatility storm.
4.Return on Assets.
Whilst profitability is very important, return on assets is arguably more important.
Company A has a return on assets of 20% whilst Company B has a return on assets of 3%, whilst both are profitable. Company A is likely to weather the storm better than Company B.
Does the company pay dividends? If the company pays a dividend of say 4%, then the dividend is more than likely greater than the alternative in transferring the investment to cash. So if you satisfy each of points 1 to 4 above and there is no need to cash in the investment then it may pay you to persevere with the investment until it recovers.
6. Get used to volatility.
We would all like our investment to go up 8% to 10% each and every year. Stock market history shows that this does not happen. We need to be prepared for this. Just because the market went up by 20% last year does not mean it will go up by 20% this year. Conversely, just because it went down by 20% last year does not mean it will go down by 20% this year. We need to manage our expectations and remember that we are buying businesses. What is the strength and security of that business?
If you need assistance with your investments or financial planning, please contact Peter Quinn by submitting an online enquiry or calling us on +61 2 9580 9166 to book an obligation free appointment.
The information in this document does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. It is important that your personal circumstances are taken into account before making any financial decision and it is recommended that you seek assistance from your financial adviser.