There was a time when the phrase ‘making your money work for you’ meant depositing your hard-earned cash into a savings account in a retail bank and letting it accrue interest over time.
In 2016, interest rates are lower than ever and DIRT (deposit interest retention tax) is at the rate high of 41%, meaning that there is little ‘work’ being done in these accounts. This situation has led many Irish savers seeking higher returns to consider investing their money in more long-term options.
Understandably, the biggest question that first time investors ask is. ‘How safe is my money?’. This question tends to crop up more when unprecedented issues like a possible ‘Brexit’ gain significant media attention.
The answer is, it’s always up to you. From the very start, investors have complete say over what level of risk their investment is exposed to. Before you pick up the phone and ring a financial advisor, a great way to get an idea of what type of investor you are is to use an intuitive online risk profiler such as PRISMA.
After a short series of questions, you will be assigned a number based on your attitude to risk. An investor who seeks to make a return on their investment but without being exposed to an excessive amount of risk could be ranked number four.
This investor could then choose to invest in funds that are matched to that level of risk such as Pathway 4, a fund that spreads investment across equities, property, alternatives bonds and cash/short-term bonds.
It’s not just Britain’s exit from the European Union that can send stock prices into fluctuation, as it’s likely that your capital could be invested in a number of different assets across different markets. In all of these markets, many factors can influence a change in trading prices and a change in your return on investment.
Knowing what these factors are, can give you a more holistic understanding of how your investment could perform.
It’s not just Britain’s exit from the European Union that can send stock prices into fluctuation, as it’s likely that your capital could be invested in a number of different assets across different markets
Along with conditions close to the market or inside individual businesses, there are a number of external, macro-environmental factors that can influence trading prices.
Oil prices
Even if you’re not that interested in business and finance news, you’ve probably heard analysts on TV talking about the price of a barrel of oil. The price of oil does not always have an impact on markets, but during the first few months of 2016, stocks have been falling and rising with the price of oil.
This is because the falling price of oil made it more difficult for energy companies to turn a profit. This, in turn, leads to a decrease in the overall value of energy company shares listed in the Standard & Poor’s 500 index (the S&P 500).
Global weather events
Drought, forest fires, flooding and harsh winters can indirectly affect stock markets. For instance, weather conditions can damage crops that a company depends on, which leads to a decline in output and a subsequent drop in profits.
In the case of the recent wildfires in Canada, for example, production was halted in oil refineries because staff had to be evacuated to safety. This event, in turn, actually helped raise global oil prices due to a reduction in supply.
Conflict and war
The seemingly omnipresent threat of regional and international disputes across the globe can cause uncertainty in the markets and cause prices to fall. Fascinatingly, history shows us that once an actual conflict breaks out, the markets can quickly correct themselves as a clearer picture of who is involved emerges and traders can quantify what the situation might look like for markets.
In the three months leading up to the US invasion of Iraq in 2003, the S&P 500 dropped 11% and then rebounded 8% when the US administration delivered their final warning to Saddam Hussein three days before the war began.
This happened again in 2011, with the US intervention in Libya. Stocks fell 5% before the fighting and then went on to rise 4% by the end of the first month of conflict.
International sporting events
Sporting events like the FIFA World Cup or the Olympic Games, have the potential to stimulate emerging markets. In August 2012, when the London Olympic Games finished up, attention quickly turned to Brazil.
The country was gearing up to host the 2014 FIFA World Cup and the 2016 Olympic Games and stakeholders were interested in knowing what positive impact the events would have on the market, having been concerned previously about the country’s lack of public investment.
At the time, an article in The Globe and Mail published Standard & Poor’s credit analyst Sebastien Briozzo’s thoughts on the matter. He suggested that “the existing sports infrastructure [in the country] would allow authorities to devote a very significant part of the original investment plans to development of additional infrastructure, which will likely keep benefiting the country long after the Games”.
A separate report from Standard & Poor’s found the fact that two of Brazil’s major media companies had won the rights to broadcast World Cup games very encouraging, predicting it would lead to increased revenue for the organisations.
Political elections
Changing governments can also impact markets. As you might expect, new ministers of finance or heads of central banks, or even a new appointment at the IMF could lead investors to speculate that existing policies that affect markets could soon change.
In a study published on Nasdaq.com, Trevir Nath examined how US presidential elections have affected the market in the past. Nath found that in the election year itself, the US market tends to fall, especially in the final year of a president’s second term.
He also discovered that volatility tends to develop in the first year following the election of a new president, as the market ‘digests change’, before gradually increasing to its peak in the second year of the cycle.
Nath’s article also points out that when the market makes significant gains, a president running for a second term usually wins re-election in a landslide, because it is believed that the market is performing well partly because of their ‘sound policies’.
Currencies can be traded, invested in, or used as a medium of exchange and can impact markets in a number of different ways. One of the most common is the impact of a fluctuating currency on a country’s exports.
If, for example, the Swiss franc were to rise to unprecedented new heights against the euro, Switzerland’s currency might become too expensive for eurozone countries to invest in and prompt them to shop around elsewhere for services and commodities.
In a report by Barclays Bank about currency fluctuation, analysts used Switzerland as an example to explain how a country’s biggest firms are even more exposed to foreign markets and the impacts of a high currency, stating that, “Swiss company Nestle … earns 98% of its revenue abroad. Companies don’t merely suffer from their products becoming pricier abroad when their home currency rises. The value of their sales abroad falls when expressed in terms of their home currency.”
The price of oil does not always have an impact on markets, but during the first few months of 2016, stocks have been falling and rising with the price of oil
So now that you know some of the external factors that can affect investments, you’re even better equipped to plan where you are comfortable investing your money. One option available to investors looking to limit the risk of a single market compromising their entire investment is multi-asset funds.
Have you ever heard the expression you shouldn’t put all your eggs in one basket? That’s the principle behind multi-asset funds, which invest in a range of assets, countries and market sectors; thus diversifying your investment across many different asset classes.
The idea is that these different asset classes behave at least partly independently of one another, so that a drop in one asset class will not put all your investment in danger. A dedicated fund manager will adjust the asset allocation of the fund depending on what is happening in the markets.
To learn more about investments that are right for you, contact a Zurich Life advisor near you today.