Choosing the Right Investment Amidst Economic Uncertainty

Choosing the right investment amid economic uncertainty Photo by Yan Krukau ( pexels )

Beginning in 2023, there are a number of economic difficulties that must be overcome, including the Russian invasion, widespread unpredictability, disruptions in the supply chain, changes in commodity prices, and excessive inflation.

To achieve maximum prosperity, people must still find ways to increase their wealth in the face of adversity, which is typically done by investing.

But is this the best decision given the circumstances? What should be kept in mind and avoided when investing in the current economic climate?

Before investing

The very first step before starting an investment is not to push yourself. Don't sacrifice your primary needs (clothing, food, shelter) and secondary (mobile phone, insurance, internet) for the sake of being able to invest. Don't take loans either. Loans actually risk adding to your financial burden if the investment doesn't pay off while the loan still has to be repaid.

The next step is to ensure the availability of an emergency fund before investing, to anticipate extraordinary events when your money is stuck in certain investments. Typically, emergency fund savings are usually six to nine times the cost of living.

The next crucial step is to first understand the investment instrument we want. There are various kinds of investment instruments that you can try, ranging from stocks with high yields and high risk, bonds with low yields and risks, or mutual funds with a mix of both.

According to the self-preservation heuristics that make up behavioral finance theory, people will be more rash in their investments because they are fearful of dealing with uncertain economic conditions. When faced with economic uncertainty, we become more illogical in our decision-making and neglect the previous four processes.

As a result, people experience mental health issues, fall victim to deceptive information schemes, and make false investments.

Understand the appropriate investment product

At least, there are five investment products that are considered by retail investors (individuals) to choose from during the current dark global economic period. These instruments are government bonds, gold (precious metal), mutual funds, stocks, and cryptocurrencies. For the record, the gold here is precious metal gold or bullion, and not jewelry.

For people who don't have any knowledge of investment, government bonds – namely debt securities proposed by the government to obtain certain funding – are a relatively safe choice. Apart from being risk-free, the concept of investing in bonds is not much different from saving.

A study from Thailand shows that people treat bonds like savings because of the similarities between the two. Therefore, ordinary people will not find it difficult to understand the investment model of bonds.

Gold could be an alternative to government bonds for three reasons. First off, due to their conservative or cautious investment culture, Indonesians may have a better understanding of the idea of return on gold.

Second, compared to other investment vehicles, gold has a lower risk threshold, and even the price of gold moves in line with inflationary trends. The price of gold rises in direct proportion to inflation.

Also Read : How to Buy Stocks Online, Benefits and Tips for Investing in Stocks Online

The last investment option is gold, which has historically and empirically demonstrated resilience in the face of economic turmoil. When the money market fluctuates, gold is frequently the first choice.

Think about the risks

So, are other investment instruments such as stocks, mutual funds, and crypto the wrong choice? Back again to the argument that we must first understand about these investment products before investing our capital there.

In order to observe stock fluctuations, corporate performance, and economic and political feelings that influence stock prices, stock investing takes more knowledge and time. The misperception that has so far been present began with the idea that investing in stocks is equivalent to saving money. This is so because the association between economic uncertainty and each sector and industry on the Indonesia Stock Exchange varies.

An easy illustration is that the price of energy stocks will increase when high commodity prices result in high inflation. But because of the high cost of innovation and low purchasing power, technology stocks will experience losses.

The randomness of stock prices is often the reason why individual investors are often trapped in pump-and-dump schemes that are usually initiated by influencers or private stock groups. This scheme refers to the provision of false or excessive information so that people buy a stock in droves and so the price is boosted, benefiting those who have already bought the stock and then sold it at a high price. Therefore, investing in stocks requires more wisdom and luck than other products.

Similarly, it's a common misconception that savings and mutual funds are the same thing. Many consumers aren't even aware that there are other kinds of mutual funds, including money market (generated from investments with maturities of less than one year, such deposits and bonds), fixed income (80% of the portfolio is made up of fixed income, like bonds), stocks, mix, and commodity.

The level of risk and the movement catalyst vary depending on the type of mutual fund. For instance, a rise in inflation is a positive feeling for mutual funds investing in fixed income, but it is a negative mood for mutual funds investing in stocks. It should be highlighted that compared to government bonds, mutual funds have a considerably higher level of risk.

Then there are cryptocurrencies, which are increasingly attracting the attention of regular investors. According to a survey, consumers invest in cryptocurrencies more frequently due to their fear of losing out (FOMO, fear of missing a trend). As a result, a lot of cryptocurrency investors still make investments despite their lack of expertise.

Because cryptocurrencies are decentralized and have no centralized oversight, the empirical results of financial research cannot explain the price fluctuations of these digital assets. In other words, it is quite challenging to comprehend the risk aspects, which is negative for investment.

The Greater Fool's Theory is the sole hypothesis that explains how cryptocurrencies move. This hypothesis holds that despite knowing that the only way for the price to increase is for "people dumber" than them to buy at a greater price, someone will nonetheless purchase a cryptocurrency in the hopes that its value will increase.

To add to that, when compared to the aforementioned investment options, cryptocurrency carries the highest amount of risk. For instance, in 2021, Bitcoin's returns were comparable to those of precious metals. The problem is that the average person only notices high returns and doesn't know what phenomena are present in each of these returns.

Important note when investing

Apart from choosing the right instrument, it is important to diversify.

This means putting our money in different types of investments. The 2008 global financial crisis has taught us how people who have diversification across investment products have a higher rate of return than people who focus on one type of product.

Remember, though, that too much diversification can lead to poor financial choices and be harmful to us. This is described as a diversification heuristic in behavioral finance theory, which occurs when a person diversifies excessively out of concern for the risks involved. The rate of return consequently declines significantly.

Three additional points should be kept in mind when selecting an investment given the current economic climate. First, remember to frequently review your investments and modify your portfolio in light of shifting economic conditions. Second, don't be afraid to seek professional advice.

And finally, make sure the investment product you choose is legal and registered with the Financial Services Authority

Also Read : 6 Ways to Use Stock Investments to Achieve Your Financial Objectives