To say that the market seems uncertain feels like a vast understatement. Inflation and ongoing supply chain woes are just a few of the issues creating uncertainty across practically every industry. When normally robust brands such as Apple and Amazon are reporting multi-billion dollar losses and missing earnings estimates, it is clear that practically every business is feeling the crunch.
While this could cause some business leaders to back out of making investments, this isn’t necessarily the best option. Yes, there is risk inherent in any kind of investment, but when looking at macro trends, the market has consistently gone up in value over the years — even after accounting for periods of recession.
To make your investments better able to withstand market uncertainty and economic turmoil, your best solution is to diversify.
Expand Investments To New Industries
One of the biggest mistakes that new investors make is funneling most — if not all — of their investment dollars into a single industry. For example, an investor might see huge growth potential in tech firms, and put all their money there.
While this can lead to rapid growth, it also poses significant risk if something were to negatively affect that sector as a whole. The famous “dot-com bubble” is a prime example of this. Venture capital investments in internet-related brands caused the Nasdaq to rise an incredible 400 percent from 1995 to 2000, only to suffer massive losses as countless companies failed.
I recently had the opportunity so speak via email with Natalie Erikson, regional head of strategic development at Axion Trade, a platform for trading Forex, indices, commodities, stocks and cryptocurrency.
She explained, “As the cliche goes, you should never put all your eggs in one basket. This is why new investors are often advised to invest in a mutual fund, since these portfolios have already been diversified to reduce risk. Of course, you can essentially build your own mutual fund by investing in diverse brands that you know and trust. Balance more volatile options with conservative stocks that have a history of steady growth to further reduce your risk.”
Don’t Overlook New Investment Options Such As Cryptocurrency
These days, the idea of what qualifies as an investment has expanded well beyond the typical ideas of stocks and bonds. Cryptocurrency has continued to become more widely adopted, with an estimated 300 million global users. Even though some cryptocurrencies see incredible growth rates, adoption in the U.S. remains relatively low.
In an email conversation, Mike Ting, co-founder of token-based yield farming and passive income generation tool Flurry Finance, offered this insight: “A lot of investors worry that crypto is too complicated to use, too volatile or not well regulated enough. The reality is that many of these fears lie more in myth. Crypto isn’t just for tech people anymore. Instead, investors should view it as a form of asset diversification — similar to how someone would historically buy gold to balance out their stock holdings.”
Similar to diversifying in different industries, asset diversification can help mitigate your risk if one type of investment (such as stocks) experiences a sudden loss in value. Of course, you should carefully vet the viability and potential risks of any cryptocurrency — particularly a token that has just launched.
Follow Market Trends To Identify When To Buy Or Sell
Even with a diversified investment portfolio, it can be disconcerting to see widespread declines across multiple industries. While many advisors recommend that investors adopt the “buy and hold” strategy, many people don’t have the discipline to do so. In other circumstances, your investment mix could mean that overall market conditions will result in major losses if you hold out.
Because of this, investors should carefully follow market trends so they can make smarter decisions regarding the timing of when they buy into a new stock or sector, as well as when to get out of a sector that is about to go through a downturn.
As Linda Ferentchak, president of Financial Communications Associates, writes for Proactive Advisor Magazine, “Trend following can allow the investor to concentrate the portfolio in rising sectors of the market—avoiding underperforming investments—with the knowledge that assets will be moved to safety when the sectors decline. Markets cycle. To be successful, an investment approach must accommodate the changing nature of market sentiment and the economic environment. Trend following forces the investor to be flexible and adapt to changing markets early rather than waiting until the pain of losing money.”
2021 has seen several sectors experience significant growth, in large part due to the country emerging from the COVID-19 pandemic. Pharmaceutical stocks, as well as the travel and restaurant industries have seen significant growth over the course of the year — a trend that would have been relatively easy to predict for those following the news closely.
Find Safety In Diversified Investments
In reality, diversification is an investment tactic that you and your business should be using at all times — not just when the market seems uncertain. Spreading your investments across a variety of sectors and asset types ensures that a downturn in one area won’t prove catastrophic to your finances.
In reality, even during “certain” times, some businesses and market sectors are going to underperform or experience declines. Diversification is a strategy that will ultimately help protect your financial assets at all times. You can’t predict the future. But by diversifying your investment portfolio, you will be better financially prepared for whatever it might hold.