Editor’s note: This article was first published in July 2011, during the euro crisis. The uncertainty over the EU and the next bailout, a possible bubble in Brazil, fixed-term deposits paying more than 4%, Inditex as a crisis-proof stock and the upcoming Zynga IPO all reflect that moment.
We’ve always said that investing in the stock market over the long term usually pays off, although these days nobody is sure of that anymore, given the turbulence and volatility of the markets (and what may still be to come). Once again we find ourselves in a market made exclusively for the savvy or for professionals, which is why we’ve told beginners more than once that now is not the time to start learning.
Nervousness has taken hold of small and mid-sized investors. They see very cheap prices, apparently an excellent entry point. At the same time, they know prices could fall again tomorrow, and they may not be prepared for things to go the other way.
Risk is where the returns are
It couldn’t be truer. In a market as volatile as today’s, using your head can earn you returns above 4% in a few hours, although if your strategy fails you can also end up with losses of more than 10%.
I was told the stock market always pays off in the long run
And so it always has. Even without any investment knowledge, anyone who parked their money in the stock market would see a return over the years (on top of the dividends). Today nobody (absolutely nobody) can say that the stock market will deliver a positive return over the long term (8 years).
We still don’t know how the European Union will end up or which country will be the next to need a bailout, and there’s the possible bubble in Brazil and the uncertainty surrounding the situation in the United States.
See also: Good or bad time to invest in the stock market? Keep an eye on the markets
The most optimistic think that buying a stock today with a five-year horizon would earn them a good return. The realists accept that they don’t know how the markets will evolve, and the pessimists… well, you can imagine.
Our investment advice for this situation
Based on what great investors have done in times of crisis, on the one hand this may be a good time to turn to fixed-income instruments, such as fixed-term deposits, as long as they pay more than 4% interest, and to buy government debt from countries that are paying high yields, as well as corporate debt from companies we believe have a good future.
In equities, as usual, we’ll steer clear of investment funds unless the basket of stocks makes it very clear that it’s what we really want. Within the stock market, we’ll look for safe stocks, focusing on companies that are weathering the crisis extremely well. If Inditex had taken a fall, it would have been an excellent entry point, since it’s a company that is handling the crisis superbly.
We can also take advantage of IPOs by leading tech companies, even if we have to look for them on indices other than the IBEX. Let’s not forget the returns tech companies have been posting on their first day of trading. The next profitable short-term investment opportunity could be Zynga, since IPOs by this kind of company have followed a very clear pattern, although that doesn’t mean it has to happen this time.
See also: Chart patterns: technical analysis, part 2
In short: since nobody can predict how the market will evolve over the long term, investors should look for a short-term opportunity and be prepared to take temporary losses, in which case they would have to turn it into a long-term investment. Anyone who isn’t prepared for that ordeal, or that risk, will always have fixed income.
Further reading
Featured image: Alvy, CC BY-SA 3.0, via Wikimedia Commons.
