Investment risks

Investment is no longer cakewalk, as we are witnessing the global economy in turmoil. The biggest factor disturbing world economy is fuel prices. Let’s count the repercussions of the one factor.

With the fuel touching skies, it directly affects commodity prices, transportation, which in turn causes inflation in economy. In India we are again touching 5% inflation. This makes central banks world over to raise interest rates. So cost of all loans goes higher. This affects all investment plans for people as well as corporate. In high inflation, the yield (returns) of government bonds and bank fix deposits decreases, which is supposed to be the most risk free investment.

So we consider second option – equity. With inflation fear, people start worrying about company profits, so disinvestments from the market start. This results in crash in market, similar to what we are witnessing now, as people start cashing on their investments. This phenomenon is termed as liquidity crunch, and this sets up more panic in the market.

Third option – real estate. As the interest rates are raised, so are the costs of home loans. So suddenly there is lack of demand for homes in the market. That’s just what is happening in America. First in low interest period, the demand for homes pushes the prices higher, and then the inflation again causes the real estate value to go higher yet. When these prices are at peak the interest rate are raised, which suddenly kills demand, which leaves people high and dry. The property prises suddenly fall, which hurts the people who invest in property at peak.

There is discernible pattern in these proceedings. This is a continuous cycle. The interest rates keep going higher and lower. Property prices follow the same path. The inflation keeps varying up and down, but fuel is something that keeps going higher and pushing inflation up. To keep check on inflation, fuel problem has to be solved. All other are cyclical phenomena.

Even then the question remains – why we are witnessing such wild swings in market. Answer here is again fuel uncertainty. That exposes one factor – lack of information. All the top economists agree on the fact that it’s information that is the only thing that keeps the volatility in the market in check. Right now, that’s one thing that no one can ensure. Not even Ben Bernanke. No one knows future of fuel, so no one can tell the limit of inflation. But one thing is sure that it’s a non-permanent problem. The solution will arise and things will get sorted out.

Till then, there is only way to secure investment. Do not invest in something, which you think is expensive, be it shares or property. Wait for market to crash, because it will, just like share markets did recently. Crash is not negative thing, it’s sign of information restoring and it’s great opportunity to invest. So hold on to your cash till you see crash and encash your investments at peak. This is what they call bulls and bears phases. By definition bulls are the ones who want the prices to go high so that they can SELL and bears are the ones who want the prices to come down, so they can BUY. It’s bears, who are supposed to know the value of market better than bulls. It’s bears, who start the Bull Run. So don’t worry, rather make merry in market crashes.

- UMESH SANT