A simple investment of $10,000 into the S&P 500 in 2011 would now be worth over $37,800 today. Such a statistic would encourage everyone to invest their savings into long-term ETFs. Despite this, it is not always accurate to use historical price movements as an indicator for the future. The S&P 500 recently reached an all-time high despite events such as Covid-19. it leaves many investors asking will this continual upward trend persevere, or will we see a significant drop in asset prices in the next few years. When deciding if now is the right time to invest, it is important that you are clear in your investment goals. This involves determining your desired return, your investment horizon as well as the style of investments, and the assets that you will target. Once these have been decided upon, additional factors such as downside protection, sector, and geographical diversification, and dollar-cost averaging should be implemented. Once your strategy is clear it will be a lot easier to determine if now is the right time to invest. Aikido Finance offers different types of investment strategies as per your goals.
Whether you plan to day trade or trade with a quantitative approach, a thorough macro-economic analysis should be deployed in the areas of interest to your investments. Huge amounts of the movement in the markets are determined by economic factors such as inflation, interest rates, and liquidity injections. In the case of the US Markets, one of the primary reasons for the recent surge in asset prices is due to the vast liquidity injections by the Federal Reserve in response to the worldwide pandemic. Such factors should be considered when choosing geographical regions to invest in as factors such as tariffs or political tensions can have adverse effects on asset prices as the economy is unable to perform at its optimal level. The macro-economic analysis is also important for choosing which sectors should be invested in. Such an example would be increasing your exposure to renewable energies following the election of Joe Biden who has expressed a desire to move the US towards more sustainable energy sources. Lastly, macro-economic analysis can be used in determining the ideal time horizon for your investments. Should you choose a long-term passive strategy, more attention can be put on the potential for future growth in different areas rather than the current levels that are being experienced.
Determining the time horizon for your investments is one of the most important factors in having a successful investment strategy. A long-time horizon suggests that an investor would favour stocks with lower levels of volatility and stocks that provide stable dividends from year to year. It would also be common to see a long-term investor have a larger proportion of his investments in lower-yielding assets such as real estate, and corporate and government bonds. In contrast to this, having a much shorter time horizon on your investments will lead to the typical investor changing their investments often. This can range from a portfolio of growth stocks to more contemporary investments such as cryptocurrencies or NFTs, which have experienced astronomical returns of late. Such investments tend to move independently of traditional assets and would require alternative research in order to market time.
Downside protection is also an important factor to consider when it comes to the question of when it is right to invest. Many investors have seen consistent growth in the stock markets in the last few years but fears to invest still remain due to events such as Black Monday and the days following the outbreak of Covid-19. These periods saw huge amounts of money lost in the markets. There is still a hesitancy amongst new investors to enter the markets as they fear a loss of their hard-earned capital. Downside protection can be utilised to protect against large losses in your investments. Downside Protection refers to the use of stop-loss orders, options contracts, and other hedging devices. These devices give investors peace of mind to invest in the stock market without the fear of losing huge proportions of their investments to market crashes. The volatility of returns can also be reduced through the use of hedging. Hedging is the process of investing in uncorrelated assets to offsets one’s position. An example would be to invest in gold alongside your equity positions. These assets generally exhibit inverse movements in price. This means that in a stock market drawdown, an investor would be protected by an increase in the value of gold. Downside protection or hedging can mitigate losses in any economic climate.
Dollar-Cost Averaging (DCA) is a process by which an investor divides up the total amount to be invested into periodical purchases of an asset so as to reduce the overall volatility of the purchase. An example of DCA would involve splitting up a $1000 investment into ten periodical investments of $100. Using this method, you are avoiding large swings in your investment early on if you are not bullish on the market. This method can be useful for cryptocurrency investment strategies that have historically been very volatile or can simply be used in a passive investing approach. Using this strategy, the question of “is now the right time to invest” is less intimidating to investors as you will not be putting your entire capital at risk straight away but can instead increase your exposure bit by bit as you become more comfortable.
“Is now the right time to invest” is a commonly asked question by new investors and experienced investors alike. Memories from Black Monday and other large market dips still remain in the minds of many people which may hamper the desire to invest. Despite this, this blog covers areas where risk can be reduced through the use of downside protection and Dollar-Cost Averaging. Additionally, we stress the importance of establishing clear investment goals. This includes deciding on the sectors, geographies, determining your appetite for risk, investment horizon, and the type of assets being targeted. Knowing this information means you can better research the outlook for your specific investments and better understand whether now is the right time for you to invest. Once this has been determined and your investment goals have been identified, the process of investing has been made simple through Aikido Finance, which has a variety of passive quantitative investment strategies, with a record of consistent outperformance in backtests. Additionally, portfolio rebalancing on Aikido Finance ensures the top-ranked stocks for your chosen strategy remain in your portfolio.
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