Should Investors Worry about their Money?

By Anne El Bey

When the key players panic about stock market woes, investors worry they will lose their money. Any negative news will have investors scrambling to hold on to their cash. Should investors worry about other countries? You need to face your fears and find ways to adjust.

Is China cause for concern?

China has too much outstanding debt, and investors worry about their growth. The Bank for International Settlements (BIS) states China could be in for a rude awakening if they continue to borrow at their current pace. The country could face a banking crisis within the next three years.  According to Reuters, within the first quarter of 2016, China’s credit-to-GDP-gap reached 30.1. The BIS has mentioned levels above ten mean a financial crisis is underway, and a 30.1 is way above that level.

After the global financial crisis, China achieved growth success due to borrowing. In 2015, the country’s debt reached 255 percent of GDP according to Reuters. The chunk of China’s debt is in mortgages. Homebuyers and developers are applying for mortgages at an alarming rate.  The BIS further states China’s debt service ratio, a 5.4, gives investors cause to worry.  

Borrowers may go into default, leaving banks with large amounts of obligations. Analysts think the government may have to come to the bank’s rescue. Although China has a massive debt, a UBS analyst states in a report there is no anticipation of a banking crisis. Investors worry when companies have huge debts because the payout is less for them.

Should investors worry?

When the stock market declines, people think of past crashes per Lew Piantedosi, portfolio manager at Eaton Vance. The fear of losing their money creates a panic. Stock prices are high (25.5) according to the price-earnings ratio of the S&P 500 Index.

• High Stock Prices

Stock prices have been outgrowing earnings since the 1980s per Chris Brightman. He is the chief investment officer of Research Affiliates. The behavior of such high stock prices could translate into a lower annual return. The reason is companies are supplying new shares for executive comps and acquisitions. Mr. Brightman states the issuing of new shares takes away 1.5 to 2.0 percentage points from the earnings yield.

• Low Profits

Profits are not as high as they were in past years. During the tech bubble reported in 2002, companies laid off several workers but did not rehire them. Businesses were on tighter budgets, resulting in lower wages.

Companies are hiring new workers again, but the skills are lacking. As a result, managers have to increase the salaries of more experienced candidates. If rates go up, so does the cost of borrowing. At that pace, profits will not be that high. Investors worry when their portfolios show a little return on investment (ROI).  

• Interest Rate Shifts

Whenever the feds announce the rise or fall of interest rates, investors worry more about their earnings. If interest rates go up at the last moment, the cost of borrowing will also rise.  Revenues and income would grow at a slower pace, resulting in lower profits.  

Get rid of the fear

It is understandable why investors worry. They have not forgotten about the stock market crashes in earlier years. Find out why you are afraid and face the reason for the fear. If you think your stocks might lose money, select a few companies in which you are interested. Study them, research, and watch how they do in the market. Based on your findings, you will know when is the best time to buy and sell. The experience will make you feel more comfortable and knowledgeable about the market.

• Set goals for yourself

In the next ten years, how much money do you want to have saved? Is your intent to buy a house, or do you want to have money in the bank for a rainy day? Once you’ve answered the questions, you will know the next steps to take, and you will know how long it will take you to get there. You can read more about setting goals here.

• Take your time

You do not have to invest much money if you are starting out for the first time. You can start out with an amount as low as $1,000. Work your way up as you become more comfortable with how the market works.

• Acknowledge things might go wrong

The market might not move in your favor at all times. You may gain or lose money based on what is happening in the market. If you see any signs your investment is at risk, make changes to prevent massive losses.

• Talk to a financial advisor

If the thought of managing your money feels overwhelming, speak to a professional. They have the experience and the ability to give you the best advice. Make sure your financial advisor has certification before hiring him or her.   

Conclusion

The financial market gives investors cause to worry based on current conditions. It could be the financial health of a company, price of stocks, and its profit margin. If you want to succeed, you need to get rid of the fear and set goals for yourself. Do not rush into anything. Take time to research each business in which you are investing. Everything may not work in your favor. Some days you may gain or lose money. If you do not feel comfortable doing it yourself, speak to a certified financial advisor.