Investment Filters to Guide Investors in an Uncertain Market

There are many reasons investors should feel a bit shaken after the booming atmosphere that followed the early days of the pandemic. Markets are in turmoil, inflation is persistent, and the possibility of a recession is firmly in the picture.

Even with countless challenges and concerns, though, it doesn’t change the fact that market downturns can provide some of the best investment opportunities for those who are willing to stay calm and make rational decisions. For investors who want to continue to take advantage of the potentially favorable circumstances, here are several “back to basics” things to consider before committing to each investment in the coming months.

1. Revamp Your Investing Strategy

Every experienced investor knows generating wealth never looks like the old Hollywood trope where someone gets “a tip” on a horserace, wins big, and walks home rich. Even having a quality investing strategy in place is not enough. You need to be willing to refine, adjust, and even pivot at times within that strategy depending on the market conditions that you’re facing.

In the past, investors could at least prepare by comparing previous historical trends to potential future conditions. In the current scenario, there is no historical analysis that can truly compare. This makes it more important than ever for investors to do their best to revamp past investing strategies with an eye toward safeguarding them against an unknown future.

The best way to do this is by simplifying one’s strategy when considering a new investment. Conduct basic research to discover baseline information, such as current market value and informed market predictions. As you accumulate data (using many of the other research suggestions below) come up with a pros and cons list for each investment you’re considering. This age-old decision-making tool is still one of the best ways to capture a truly informed notion of whether an investment is worth the risk or not.

2. Look Deeper Than Trends and Superficial Figures

Day traders may try to time the market and make rapid-fire decisions based on temporary circumstances. True investors must resist this temptation and play the long game. According to iconic investor Warren Buffet, “If you aren’t willing to own a stock for 10 years, don’t even think about owning for 10 minutes.” 

Another way to word the advice is to never buy a stock for its own sake. Instead, buy the company behind it. If you don’t believe in a company, it is always risky business to buy its stock. When evaluating a stock, conduct serious research about an organization. If in that process, you find that it is operating with a sound business model and room for impressive growth, you can resist the temptation to sell based on any short-term fluctuations in its stock price. With patience, you’ll be able to see that potential materialize over time.

On a day-to-day investing basis, this translates to conducting pre-investment research that goes deeper than passing trends and superficial figures. If you’re considering a startup, check out its mission statement, forecasting, and business plan. For an established company, review their latest press releases and financial statements. Alternative investment can be more complex, but even then, something like an NFT or cryptocurrency should still have roadmaps and clearly communicated information. 

If that information isn’t easily accessible, don’t invest in the project. Even if the information is available, but you struggle to grasp what a business is doing, think twice before investing. Buffet is also famous for saying, “Never invest in a business you cannot understand.”

3. Don’t Risk Money You Can’t Afford to Lose

When you use excess money to take a calculated risk with a promising opportunity, you’re investing. As soon as you do so with the cash that you need to live, you’re not investing. You’re gambling.

The thrill of investing can make it easy to forget this common advice in the heat of the moment. Particularly in a hot and cold market, it is easy to slip into emotional reasoning as investment opportunities come and go in the blink of an eye.

That’s why, over the next few months, in particular, it is important for investors to reorient themselves around this critical two-part piece of advice. Do not use emotional reasoning in your investments, and never risk money that you can’t afford to lose. 

As you evaluate different financial investments in the turbulent times ahead, always invest money that is not essential to your daily living expenses. That way, whenever you decide an investment is worthwhile, you add an additional layer of personal peace of mind. There is protection knowing you’re not risking your livelihood in an unpredictable and risky investing atmosphere.

4. Re-evaluate Your Investing Relationships

Whether you realize it or not, you rarely make an investment decision alone. Everyone is influenced by outside sources, and the quality of those information channels can play a key role in how well your investments do over time.

This starts with the sources you use to receive market updates and conduct research. If you want to make sound financial investments moving forward, review your track record with these sources of information from time to time to ensure they’re providing accurate and profitable data.

Another area to consider is your close relationships with other investors and investing partners. According to LifestyleInvestor, Justin Donald, “If you want to shift your mindset and emerge with a brighter future — mindset matters.” The investing expert expands on this key piece of advice by referencing the classic concept that a person is the sum of the five people they associate with the most.

Your financial relationships, especially in the context of investing, can impact how you think and make decisions. On the one hand, if you listen to overly reckless or unthought-out opinions too often, you may introduce too much risk into an already unstable investing environment. On the other hand, if you download conservative investing advice regularly you may miss important opportunities.

Consider whom you’re surrounding yourself with at the moment. Make sure you have quality individuals and investing partners whom you can trust and who can help you make confident timely decisions.

5. Embrace Dollar-Cost-Averaging When You Can

One of the simplest and most profound investing tools you can utilize in an unstable market is dollar cost averaging (DCA). This is the best way to overcome the challenge of timing the market. Rather than trying to put money in at the bottom of a dip (which is extremely challenging even for seasoned investors) many embrace DCA as a way to spread out the risk and still reap the reward.

DCA is simply investing a fixed dollar amount into an investment on a consistent basis. For example, consider a startup stock that is hurting at the moment but which you are convinced will thrive during a recession. Rather than investing $10,000 all at once at some point in the first half of next year, a DCA approach could mean putting $1,000 into the same investment each month starting in January and ending in June. This immediately spreads out your risk, ensuring that at least some of your money will be invested when things are lowest and have the largest upward path toward profitability.

It is always dangerous to assume you can be formulaic when markets are unpredictable, but DCA is the closest thing you can get to an easy and applicable way to format your investing. It is an excellent way to be preventative about potential financial damage without stunting your investing activity.

6. Stay Diversified and Disciplined

It is impossible to overestimate the importance of diversification in investing. Diversification allows investors to tap into multiple profitable investments at the same time. When things go south, either with a specific investment or the market as a whole, diversification also plays a critical role in spreading out risk and avoiding unnecessary losses.

But the role of diversity goes further than that. According to economic historian Peter Bernstein, “diversification of risk matters not just defensively, but because it maximizes returns as well, because we expose ourselves to all of the opportunities that there may be out there.” 

Bernstein is the creator of the efficient-market hypothesis, which claims that it’s impossible to “beat the market.” This is because current asset prices always reflect a risk-adjusted valuation that takes all current pieces of information into account. Thus it is always smarter to diversify and invest in long-term growth than to trust luck with a specific purchase at a particular moment.

Diversify your portfolio. Invest what you can afford to lose. Create positive investing relationships. Use dollar cost averaging. When applied thoughtfully, these tools can help investors safeguard existing assets and generate new wealth, even in an unstable or straight-up hostile environment.

Remember to stay up to date with your research, as well, and use that information to revamp and align your investing strategy with market conditions. That way, you can stay targeted, informed, and effective as you invest in the unknown days ahead.