Speculation and Sentiment impact share markets

January 2016 saw a stampede from share investments globally. It coincided with oil prices dropping to below US$30 per barrel. The other factors affecting share markets were slowing China economic growth (the China factor), US Federal Reserve planning to raise Fed Interest rates this year (hence increasing cost of funds), and slower global economic growth (Japan and ECB using negative interest rates to arrest the fall in their economies).

All economies are now so interconnected that no one economy can remain closed to external influence.

The months of January and February saw fear in investors’ minds. Investors were willing to sell off even at huge losses. One thing about fear is that it tends to overshoot on the downside to below what is reasonable or fundamental value of any equity.

This month reversed the losses in the stock indices. The Straits Times Index (STI) recovered to the level last touched at the end of last year. If we strip the fear factor away, the sell-off in stock markets would not happen the way it did.

Sentiment in stock investment is something we have to live with and it can result in irrational decision-making. Quick traders wanting short-term profits jump at this kind of sentiments to speculate which way the stock prices are moving. Investment in stock market can be one of speculation and predicting the future. We all do that at varying degrees, but this is not going to get us very far unless one is lucky. I still prefer to invest with a view of picking a stock with good business potential. This is one way of hedging the risk in investing in stocks.

The outlook for the global economy is still not rosy. That has not changed. In this month alone, I had been reducing some investments and realising them for cash even at losses. Cash and cash equivalents are now about 25% of total portfolio. I am still invested 75%.

Copyright © 2016, limkimtong for Living Investment

The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.

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