The stock market volatility has been very erratic this year. What used to be an investment arena has now turned into a global Casino. If you have been avoiding checking the performance of your portfolio, let me put you at ease: you are not alone!
You might be asking yourself why are we seeing such volatility?? There are numerous reasons and factors for those crazy swings. Let me start by saying that the average investor is not causing this ruckus; the average investor is caught in the cross fire between the huge fund managers and high frequency traders, i. e. price manipulators. In other words, the shear volume of trades are being generate by HFTs- the exact figure is difficult to ascertain, but several financial analysts have said that some 70% of American stock trades are high frequency trading.
The other contributing factors are geopolitical in nature. Since the globalization era, things affecting one nation now have direct links across global economies. The complex interaction of trade, capital, information, and technology is leading to a new global convergence, for better and for worse- Countries are more connected than ever.
IMF Managing Director Christine Lagarde says: “… while the IMF is making progress at mapping global financial risks and the links between the financial sector and the real economy, the biggest challenge is persuading national policymakers to take a global perspective.”
How is the World Connected into a Global Economy?- this article talks about the evolution and mechanics of world inter-connectivity. Great read, it paints the picture!
Monetary policies have been putting a lot of pressure on the direction of the economy. The question is not whether the Feds will raise rates, the question is when? This uncertainty is weighing heavily on investors’ mind. Signs such as inflation, job growth, dollar strength are the leading indicators for that rate hike. Many see this hike as early as December, others believe it could be in March.
So, how does that affect your portfolio?? It all depends on your investment strategy; short, intermediate or long term. In today’s chaos, I highly suggest you remain long- if you have been hurt by this stock market volatility, don’t panic, stay the course. On the other hand, if you have profits take some off the table, and hold 30-40% in cash. Investing in well known, fundamentally sound companies is the best hedge against the house casino! If you are uncomfortable hand picking those stocks, I encourage you to look into ETFs. Unlike mutual funds, they provide better liquidity, lower fees, and more diversity.
If you want to learn more about ETFs, Dave Nadig has a well written article- follow this link–> ETFs.
In summary, I highly recommend you analyze your portfolio and make the necessary adjustments to ensure it’s aligned with your long term investment goal and strategy. Also, it’s a good idea to hold a cash position until all this chaos settles down.
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