Feeling confident investing in the markets is the most essential aspect to having a good sound approach. Getting worried, wondering if things will be okay, being confused as to what is happening – these are some of the many gut-wrenching concerns that can turn your investment experience into never-ending stress. It is vital to understand what is going on within your financial world so that you can have a good visual and mental grasp as to how things are performing within risks of the market. Financial Literacy is the key. if you can read the markets, you can interpret the meaning. Here is some great terminology to help.
Market performance is based upon total return. Total return is a strong measure of an investment’s overall performance. As the company’s performance improves, the expectations go higher. The average annual stock market return is based on the index called the S&P 500 which is often considered the benchmark measure for annual stock market returns. Total Returns in any year can vary based off of many economic indicators. Broad economic indicators can play a big role. They can influence the market by the estimates & expectations of the numbers & data they present:
• Gross Domestic Product (GDP)
• Consumer Price Index (CPI)
• Consumer Confidence Index (CCI)
• Interest Rates
• Economic Growth
For example, generally, rising unemployment numbers foreshadow lower economic growth, and lower unemployment numbers show higher economic growth. The estimates & expectations of the numbers & data that is released at the time of these ongoing reports is what makes things change. More specific indicators can also influence performance within a market such as:
• Trend indicators – measures the direction & strength of a market.
example: Moving Average – creates a single, flat line that effectively eliminates any variations due to random price fluctuations. The 50-day and 200-day moving averages are most common.
• Momentum indicators – determines the strength or weakness of a market. example: Relative Strength Index, or RSI, measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the market.
• Volatility Indicators – measures the level of risk, fear, or stress in the market. example: The Volatility Index, or VIX, is a real-time market index representing the market’s expectations for volatility over the coming 30 days
• Volume Indicators – determines trading signals at various points in a market. example: The Volume Weighted Average Price, or VWAP, is a trading benchmark & gives the average price a security has traded at throughout the day based on volume & price.
Market Risk exists because of price changes. Market risk, or systematic risk, affects the performance of the entire market simultaneously. Market risk is the possibility that an individual or other entity will experience gains or losses due to factors that affect the overall performance of investments in the markets. Market risk may arise due to changes to interest rates, exchange rates, geopolitical events, or recessions. Market risk cannot be eliminated through diversification. Specific risk, or unsystematic risk, involves the performance of a particular security and can be protected against through diversification. An example of unsystematic risk is a company declaring bankruptcy. Some common types of market risks include:
• Interest Rate Risk – refers to the possibility interest rates will rise & reduce the value of an asset.
• Equity Risk – involved in the changing prices of stocks based on a company’s performance.
• Personal Risk Tolerance – Recognizing how you feel when the value of your investment moves up and down is one of the basic components of investing. While patience and long-term focus are two of the best ways to grow assets over time, this is more difficult for some people than others.
• Commodity Risk – covers the changing prices of commodities such as crude oil & corn.
• Currency Risk – refers to the changes in the price of one country’s currency versus another.
While market risk is a byproduct of investing, outperformance and underperformance have historically moved in cycles. Taking a consistent approach helps to reduce downside risk. At Ironcrest Capital Management, we strive to make sure that everyone we work with has a strong understanding of The Financial Literacy within their investments. Having a good approach and focus on the most important factors before investing is key. Let us help you make the right decisions. If your current investing approach isn’t working, reach out to us so we can help.