Today’s investor faces many challenges. Gone are the days of studying an investment and if its fundamentals look good, you make the buy. It’s just not that simple anymore. There are so many factors outside and inside the world of economics that play a key role as to whether an investment should be made or not. There are also plenty of moving parts that can make the most obvious investments seem confusing.
There are many non-economic factors that effect investments today: politics, war, weather, and terrorism, just to name a few. For instance, before an investor makes that investment into the financial sector, they must consider the new policies their government is trying to implement. If an investor is looking at buying oil or gas investments, they should consider whether it will be cold or mild, whether the hurricane season will be busy or uneventful. An investor today needs to know what our government is thinking and what countries in other parts of the world are doing. Many types of events can influence the performance of the stock market and investors have to be mindful of them.
On top of the non-economic events, investors should know how economic indicators play a role in investment selection. Investors should understand the effects of interest rate movements and currency and how these can enhance or devastate one’s returns. Individuals should also understand inflation and how it can stunt an economy’s growth. If somebody were to invest on their own, these are some of the important factors to keep in mind.
So let’s assume an investor understands these economic terms. Does investing become easier? Not necessarily. An investment can have the best fundamentals and still not rise in value. This is because there are many traders today studying the charts of these same investments you are looking at. If the chart (technical analysis) says sell, fundamentals may not matter. Based on the charts, traders and money managers place buy and sell orders at certain prices in anticipation of the investment’s future movement.
In some cases this is done to protect profit and in some instances it is a growth strategy. Either way, it can be quite devastating to see a stock sell off if it falls below a certain price point because many investors have placed hundreds of sell orders at certain technical levels. In many cases, the sells are all computerized and the price can fall like a rock if it should “break a resistance level.” In addition to these sell and buy orders which create a cascade of trades causing a stock to rise or fall sharply, investors should also consider options traders and short sellers. These individuals play a huge part in determining which way the stock market goes and how fast it will take to get there.
Therefore, making investments decisions on a daily basis can be quite difficult. There are many things to know and factors to take into consideration. This is why I believe most individuals should leave their investment decisions to investment professionals. These professionals should be the ones to explain why, for instance, the price of gold is so high or if you should be buying oil or bank stocks. I believe your advisor needs to have their finger on the pulse of the market at all times to know the latest trends and capitalize on them. There are many different types of traders and long term investors affecting the market each day by their actions, making it very difficult for those that do not have the time or knowledge to manage their own portfolios effectively.
If you have any questions regarding the above article or are looking for an Investment Advisor to help you with your portfolio, please send me an email at asmall@dundeesecurities.com. I will be glad to speak with you.
Allan Small is an Investment Advisor with Dundee Securities Corporation, a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities and the author is not a Dundee Securities analyst. The views expressed are those of the author alone, and are not necessarily those of Dundee Securities or Metro Canada.
