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September 6, 2017

Why Traditional Investment Strategies Are Irrelevant Today?


While you need to be well-grounded in the fundamentals, you will only succeed if you can stay relevant in changing times. In the rapidly-evolving world of investing, holding on to old methodologies will do more harm than good. There are a number of factors that contribute to the failure of traditional investment strategies in today’s world, ranging from market volatility to inflation. Understanding how these factors affect investment outcomes can help you make better decisions.

Market Volatility

In the past, most investors followed a growth strategy that involved investing in the safest stocks, rinsing, and repeating. This formula worked as long as they maintained a long-term view. While there were bear markets to deal with, they occurred at a much slower pace. Overall, market momentum was more predictable, which is something that is no longer true today. Nowadays, market swings are more violent and bear markets are happening more frequently. Old investment strategies that do not take into account the extreme volatility of today’s market will fail more often than not.

Inflation and Low Interest Rates

The US Bureau of Labor Statistics reported that the year-on-year inflation rate for June, 2017 was 1.6 percent, a substantial drop compared to the average of 3.28 percent between 1914 and 2017. Despite the fall in inflation rate, investors are still concerned because of the low-yield environment they face today. In the past, you can minimize your market exposure while reaping a substantial return by shifting your equity investments to treasury bonds and certificates of deposit. However, in today’s low-interest rate environment, you may have to consider returning to market exposure in order to gain substantial yields.

Global Economic Interdependence

Global interdependence is increasingly becoming a significant part of business operations. According to S&P Dow Jones Indices, almost half of the sales of companies in the S&P 500 Index come from countries outside the US. While the blurring of lines between domestic and international businesses means greater growth opportunities, it adds another layer of volatility to the market.

Emotional Investing

Occasionally, investors may make decisions based on gut feelings and whims, but this often leads to a bad ending. According to Global Resources LLC, people should only take risks when the odds are in their favor. In today’s unpredictable market, it is especially important to analyze situational dynamics and calculate your odds properly before investing. Emotional investing is actually a shortcut to eliminate the need for analysis, and it has been the undoing of many investors.

The buy-and-hold investment strategies of the past no longer work in the fast-changing market of today. In order to succeed as an investor, you need to implement strategies that actively seek growth opportunities while providing protection against the frequently-occurring downsides.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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