“The individual investor should act consistently as an investor and not as a speculator.” – Ben Graham
The ongoing global turmoil continues to play a significant role in the current financial market volatility. This situation does not mean that investors should sell off their investments and withdraw their money from the capital markets or stock exchanges. However, it is advisable that investors re-evaluate their time horizons and trading strategies.
Time Horizons and Investment Strategies
Before we look at reasons why you should relook at your trading tactics, let’s look at what a time horizon and an investment strategy are:
Wikipedia defines an investment strategy as a “set of rules, behaviours or procedures, designed to guide an investor’s selection of an investment portfolio.”
Not all traders have the same end goals and profit objectives. Furthermore, different strategies suit individual investors as each person has different strengths and skills. The common denominator is that all investors have to decide where their line between risk and return is. Traders can take the middle road; while, others accept a higher risk for the expectation of higher returns and vice versa.
Simply stated, a time horizon is the “length of time over which an investment is made or held before it is liquidated” or closed.
A short-term trading strategy’s or day-trading’s time horizon will range from a few seconds to an entire day. The takeaway factor is that the trading position must be opened and closed within a single day. On the other hand, a long-term strategy’s time horizon can be indefinite. Finally, investment time horizons are determined by the investor’s goals and not by the mechanism.
Reasons to re-evaluate your investment strategies
As described above a time horizon or trading tactic is determined by your reasons for placing the trade in the first place. Not all deals have to have the same strategy. Ergo, all underlying assets are different and react to the market conditions differently.
A Lionexo financial analyst notes that “it is important that every time you place a trade, you first need to evaluate the current market conditions rigorously to determine your trading strategy.” Thus, it is not a good idea to decide on your trading tactics when you first start trading and continue to use the same trading strategy. Furthermore, the analyst goes on to state that the company “believes that to trade successfully in the continued market volatility; it’s wise to employ a short-term strategy.”
Therefore, let’s have a look at the reasons why you should relook at your trading strategies:
Your exposure to risk needs to change
It is normal for your risk profile to change several times during your life. For example, when you just enter the workforce, it is a good idea to execute a trading strategy with shorter time horizons; ergo a higher risk. The consequences of losing money are not so dire when you are younger. On the other hand, when you are close to retirement, it is wise to change to a low-risk trading strategy.
Your personal or financial circumstances have changed
During the course of your life, the amount of money that you will be able to invest in the financial markets will change. For example, you will not be able to invest as much money when you marry and have a family as the majority of your income will be spent on looking after your family.
The market conditions have changed
Your trading strategies should be very different between a bull and a bear market. Furthermore, if market conditions are relatively stable, you can consider a medium- to long-term trading strategy with a long time horizon. However, if market conditions are volatile, as they currently are, then you need to consider day-trading or a tactic with a very short time-horizon. It is not a good idea to let trades extend overnight as it’s hard, if not impossible, to predict what will happen to the markets while you are sleeping.
It is easy to perceive that the takeaway point of this article is not to invest in one of the global financial markets when they are very unstable and volatile. It is not. It is still possible to grow your investments during the current market instability. However, it is vital to consider the longevity of your trades and adjust their time horizons according to the socio-economic and geopolitical climate.