For those who missed buying into the market late last year or early this year, now is actually a good time to enter the stockmarket. Prices are drastically lower with massive sell-offs due to the US sub-prime lending scare. And if Ben Bernanke, Chairman of the US Federal Reserve, lowers interest rates, it should bouy the market.
Most people may be turned off by the bumpy ride. But we need to remember that volatility is part and parcel of the financial markets- and in fact, without volatility, we wouldn’t be able to allocate resources efficiently. What does that mean? If prices did not go up and down, then the highest and best companies wouldn’t get good prices, and likewise bad companies wouldn’t get bad prices. What’s worse, upcoming small companies will have no chance to become large companies if prices did not change.
Of course, current market volatility has much to do with “gambling” by investors as well and not with allocation of resources, but over time, the market prices do reflect the worth of the company. Stock investors, short or long term, will always bet big on companies that are profitable and have a good story to tell over companies that are languishing.
So what stocks should you be picking? That depends on two things: the length of time you expect to be invested (1 week, 1 month, 1 year, 3 years, etc), and your risk appetite (what level of volatility scares you? 1%- don’t bother investing in the stock market, 5%- put your money in savings, 10%, 50%?). If you’re not easily scared off, you can consider the 2nd liners that have fallen a lot. If you want less volatility, stay with the big cap stocks (those that compose the index).
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