The introduction of tariffs in the US has created a volatile stock market. In general, share prices took a hit on Tuesday (4 March) before staging a recovery the next day.
In this type of environment, it can be difficult to know what to do. But there are a couple of things investors can do – and avoid doing – to give themselves the best chance of achieving success.
What not to do
Let’s start with bad ideas. I think trying to work out when shares are going to reach their lowest point – and hold off buying until then – is a bad idea.
One reason is that it’s very difficult to figure out when the lowest point for a stock will be. Barclays (LSE:BARC) has been a great illustration of this.
The stock fell 6% on Tuesday and the downward momentum looked set to continue. But it recovered 4.5% on Wedneday, meaning investors who held off buying might have missed out.
Where the stock goes next is anyone’s guess. So I don’t think trying to wait for the declines to end and then buy is a particularly good strategy.
Strategy 1: looking for value
Instead of looking for when stocks are at their cheapest, one strategy involves working out when they’re cheap enough. And I think this is a good approach for a certain type of investor.
With Barclays, this involves estimating how much the bank’s going to make through its various operations. The question is then how much that future income’s worth.
Undervalued stocks can keep falling. But sooner or later, stocks tend to reflect the value of the underlying businesses and the share buybacks at Barclays should help this process along.
A volatile stock market can make shares trade below what they’re worth. But this strategy relies on being able to assess a company’s future cash flows accurately – and this isn’t easy.
Strategy 2: cost averaging
An alternative strategy involves identifying businesses with strong long-term prospects and buying shares consistently at different times. This can help smooth out volatility.
Again, Barclays might be a good example. It combines a strong retail presence with one of the largest investment banking divisions in the world, making it more diversified than other UK banks.
In order to assess this accurately though, investors need to weigh this strength against risks, such as the potential for a change in bank regulation. And this is far from straightforward.
With the right businesses though, this strategy can work. Investing regularly gives the best chance of buying at the lows and as long as the stock goes higher, investors can do well.
The most important thing
The two strategies have something important in common. Rather than attempting to predict what the share price might do in the near future, they focus on the underlying business.
With Barclays, its diversified model has resulted in a less efficient business than other UK banks. But at the right price, I think investors would be wise to take a closer look.
In a volatile market, an opportunity could well present itself. So investors would be wise to keep a close eye on share prices for potential opportunities.
This post was originally published on Motley Fool
