Top tips for the DIY investor
Monday 9th February 2015
By Gaspar d’Orey, CEO and co-founder of Zercatto
The stock market is complex, and can often seem alien to those who aren’t familiar with its more intricate workings. But this doesn’t have to be the case: with a little help, any DIY investor can start on the road to investment success.
In the interests of helping you develop your understanding of the markets, I want to share some of my top tips for those who want to take their investment portfolios to the next level and learn a few advanced tricks to read the stock market.
Understand what influences your share price
Over time, countries’ economies have become more closely linked. This is an incredibly positive development, but it has increased the number of factors that influence share prices globally. To benefit your own portfolio, then, it’s important to understand which of these factors influence share prices.
A lot of people believe that a company’s performance year-on-year is the biggest factor in its share price. However, while a company’s individual result is reflected in its share price, there are four other mitigating factors to consider when thinking about the influences on your portfolio: the economy, the market, the sector, and the industry. If the economy, for example, is performing well, then your stock is also likely to be performing well. The industry, sector, and market your stock falls under have a similar effect – if they are in a positive cycle, your share will be too.
The power of the economic cycle
But what do I mean by a cycle? Economists have identified five economic stages. These cover the economy’s expansion, slowed growth, crisis, and recovery periods. And because the economy’s performance at large affects the markets, these stages are directly linked to the stock market cycle. This matters to you because each sector represented in the market has a different optimum time in the cycle for trading.
So which sectors perform best in each stage? That’s difficult to predict, partly because we don’t know how long each stage lasts until it’s over. However, we can use market data from the past few decades to identify patterns in performance where sectors are at their most profitable and when they generate the most returns.
In the early expansion stage, consumer goods, transportation and technology trade intensively. Capital goods continue to be traded during middle expansion. While in late expansion, energy, basic materials (i.e. mining, metals, chemicals) and consumer staples take centre stage. Consumer staples continue to dominate as the cycle turns to early contraction, along with utilities. Once the cycle reaches late contraction, consumer cyclicals and financials are the most intensively traded.
How can you identify which part of the cycle we’re in?
The list above doesn’t automatically mean that you should invest in technology during early expansion, though. After all, how can we tell that we are actually in a state of early expansion? There are three approaches we use to uncover this information:
1) Look at the sectors that are performing well. If they match up to the list above, it’s a good indicator of the economy’s performance more widely.
2) Use indicators like interest rates and inflation.
3) Employ technical analysis, such as looking at heat maps and the “leaders” and “laggards” of the stock market.
Economic indicators are external political factors that influence overall market performance, as we see when the market reacts to big political announcements. Monetary policies are a good example; for instance the recent QE proposals in the Eurozone have impacted currency valuations, most notably the Swiss Franc. Likewise, interest rates and inflation can change the market’s stability and are directly linked to economic cycles. In periods of growth, inflation and interest rates remain low while industrial production increases. It’s well known that such periods of growth offer better opportunities to invest as people tend to borrow more money and save less in pension plans, for example.
With this advice, you will be able to identify which industries to keep a close eye on, and adjust your investment strategy accordingly. You don’t need to be Nostradamus to develop a coherent, winning strategy – it just takes a little bit of research, and quite a lot of trial and error.
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Editorial Contact Details - Conor Shilling
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