When the price movements in stocks across the board suddenly look intimidating, long-term investors may be tempted to give in to their fears, and their investment portfolio strategies will reflect this. Kevin Canterbury of Arizona discusses current market commentary based around how to build a solid long-term investment portfolio regardless of large-scale events.
According to experts, anyone managing investments can’t effectively create a portfolio that maximizes alpha returns on investments when their decisions based on fears or conventional reactions. Instead, leading investments are created by making risky decisions that are focused on long-term views, focusing on an enterprise’s intrinsic value.
Find more below on how to engage in market commentary by understanding the three ways to focus on what matters when it comes to big stock price changes, resulting in a profitable portfolio that focuses on a bright future rather than reacting emotionally.
Focus on What Matters in the Market
Focus is an important factor to everday success, and it is quite ironic that many seem to lose that skill when it comes to strategies as important as professional investments. Rather than keeping our eyes on the prize and making decisions that reflect this, it can be easy to focus on what could be lost disproportionately to what may be gained later on.
This can lead to decisions based in fear instead of on what an investor can actually know with certainty. Such concern can lead to fewer returns on a once-promising investment portfolio.
To prevent this, the following three steps should be considered for a long-term hedge:
- Don’t focus all attention on short-term fluctuations in price
- Consider national ranges and take action when the price climbs above
- Take action if a stock drops, but only when it isn’t connected to long-term factors
The above steps may run the risk of seeming far too simple to be effective or too vague to be helpful without further explanation, though, so more detailed information on each step is discussed below.
Pay Little Attention to Short-Term Fluctuations in Price
When prices fluctuate on a company that investors hold significant stock in, the result can feel intimidating. Instead of rushing to take action, analyze whether or not these fluctuations are happening because of a fundamental issue.
Often, these alarming price fluctuations can simply be the result of a company lowering their earnings in the present so that they can invest more into their future, especially during turbulent events. This means that remaining consistent and basing decisions on an investor’s understanding of values of the company itself will lead to a far more profitable future.
Take Action if Prices Rise High Above National Ranges
One of the only reasons an investor should take action is if the prices of a company’s stock rise much higher than national averages. In this case, the action that should be taken is either reallocating funds from the overpriced company to another that is more fairly priced, or just reducing the portfolio position weighting.
Act When a Stock Drops Without Being Connected to Long-Term Factors
Another major reason to take action is in the face of stocks dropping when the cause is not based in long-term, fundamental factors. However, when this is the case, the best course of action for the investor is actually to increase the return that could be expected in the future by buying more shares at a better price, rather than attempting to salvage the investment based on a sudden fear.
All of this is based in looking to the future, the long-term rather than the short-term!
In Conclusion
The worst possible thing to do when building an investment portfolio that creates alpha returns is to make decisions based on fear. This can be difficult to do when current prices dive or rise, but by paying little attention to the short-term and taking the right action during price fluctuation for the long-term benefits, it is possible!
Making decisions based on a level-headed view of a hopeful future is often rewarded with increases in alpha returns on a portfolio, and the chance to continue practicing the value of right perspective.
