Many of the people find an easier way to answer these, and that is to abstain from investing at all. This is the customary mindset of most of the people today. Why invest my money with the risk of losing it and then try to protect that against all these lows and highs? Sounds quite legitimate, doesn't it? But is it not even riskier to bury your money underground just like your great grandfather did.
No billionaire is so because of letting their money sit in the bank accounts but instead, investing it. Most of the people agree that investing is a desideratum but are not really sure about how to do it. Addressing the ever-changing market, here are some points to keep in mind when it comes to inflation, interest rates, economic growth, volatility and financial leverage.
Falling Rates of Interest Lead to a Falling Interest to Invest?
The USA Federal Reserve Board talks about how the fluctuating rates of interest largely conditions the stock market and the economy on the whole. A low interest rate coaxes additional investment spending. This consequently gives the economy a boost in times of faltering rates of growth. This is the most robust move for the Fed to steer the economy out of recessions. The Mantra of many of the central banks' being 'lower for longer', the interest rates show no chances of going up in the near future. In the USA, interest rates are at historic low today; however, in Japan and EuroZones, they go below zero, in the negative, meaning that you will get less than what you invest.
How to Utilise Low Rates of Inflation?
So a high inflation rate implies a fall in the real cost of the capital and in the value of the reserves. On the other hand, a low inflation rate makes it easier to predict future costs, prices and wages. A falling inflation rate can lead to increased returns for the investors. If the rate is so due to depressed demand, it can lead to deflationary pressures . It increases the competition among the firms. A low inflation rate encourages investment. The stability that comes with low inflation invites the people to invest in riskier assets, which leads to higher growth rates in the long run. At the same time, inflation induced by depressed demand, makes the market unattractive. Inflation can eat up your money and assets. To prevent yourself from losing to inflation, you need to keep up with the inflationary rate and the tax rates and invest your money wisely.
Investing in a De- Escalating Economy
When the rate of economic growth is diminishing, the corporate growth also starts faltering. As the demand for the goods or services falls, so does the margin earned which consequently leads to negligible corporate profits and growth. As the main motive of investment is gaining dividend and capital appreciation, people abstain from investing in forms that are running low on profits so as to safeguard their resources against losses. The stock price falls as a demand becomes negative.
Highs and lows are inevitable to any economy. If a person tactically allocates their resources, the risk of losing their money can be reduced manifold. Customarily, people tend to invest during the boom as a prosperous economy appears to be more secure. The market opportunities, risks and volatilities are the same to all, but the portfolios along with market returns differ because of a person's capability to read the economic cycle and act accordingly to maximize their profit.
Higher the Volatility, Lower the Returns?
Volatility, simply put, is the risk posed by the financial market. A volatile market is one which is highly unpredictable and hence. If a market is volatile it means that it deviates from the mean, but this deviation is not always negative and if utilised wisely, volatility can be a way to increase your assets and returns. The volatility of the market can be an opportunity or a shortcoming, depending upon the investor's behaviour.
Volatility is inherent and the market shall always be volatile, but none of us can control this. What we control is how we deal with it. Volatility can be beneficial as well if you design your portfolio in such a way that it benefits from volatility and utilizes it instead of treating it as a risk. When you outperform the market, you beat volatility. Evaluate how much risk you can carry so that even when the market is underperforming, you outperform it. When the market falls to, say, 10%, you fall by a lesser percentage. Every person has a different risk profile and it is up to you how you manage your assets and expose them to the market. So this way, you don't have to worry about controlling volatility by managing your portfolio.
Financial Leverage: An Easy Path to Success or a Thorny one?
A highly leveraged investment, property or firm is one that has more debt than equity. It is a situation where one is not able to issue stocks to aid capital but instead relies on debt to finance investments. Leverage is really attractive for a firm that expects greater demand of its products or services in the future and requires assets to fulfill this demand. But this can be a colossal risk if the forecasts made are erroneous.
Financial leverage can be utilised to boost up a firm. The balance sheet plays a very vital role when it comes to the proper utilisation of financial leverage. You need to maintain a balance between the indebtedness and the profits. Leverage is helpful to boost up a company with low assets; but ultimately it depends on how you manage it and how the market perceives it.
Overall the financial market is nothing but the interplay of factors such as these, characterized by times both favourable and unfavorable, by days where you hit a lottery and days where you lose it all. If you think this is a threat to your hard earned money, you are looking at just a side of it and not at the whole of it. Financial risks are just a step to your investing journey. Nothing is offered on a silver plate to anyone in this world. As kids, we were all taught how we can never gain anything without pain. I don't think anything else is more accurate than this saying. It is next to impossible to become financially secure without learning to invest, manage and increase your wealth. Start today to secure tomorrow!