We insure ourselves for a lot of things in life from our home, our belongings, our car, our medical expenses to even our lives. Insurance is just a way to protect ourselves from the uncertainties in life. In an unexpected event, we are still able to carry on surviving through life in the case of all types of insurance coverage which allow a financial payout secured through an insurance company to tide through life crisis except in the event of death which already cost us our lives. In this case, our loved ones who are still around are able to carry on life based on the insurance payout to tide them over the crisis of losing a loved one (especially if the lost one is the breadwinner of the family).
In stock investment, one can consider buying insurance for his investment. By this, I do not mean literally buying insurance, but "buying insurance" in the sense of preparing for the wild swings of the volatile stock market. Stock investing is volatile in the short-term, but profitable in the long-term. To protect against the wild swings of the volatile stock market, one has to "buy insurance" by having an adequate amount of emergency fund and opportunity fund to capitalise on any wild swings in the stock market.
There is no hard and fast rule to how much emergency fund and opportunity fund one should hold on to in preparation for investment opportunities when the occasions arise. It depends on the investor. A conservative investor will hold more emergency fund and opportunity fund in proportion to the amount of his investments. An agressive investor will likely invest almost all of his available cash leaving little cash reserves each time to capitalise on any opportunities which may arise occasionally.
A general guide is to have an emergency fund which is equivalent to three to six months of expenses to tide through any emergency such as retrenchment from work or inability to work due to circumstances like disability, illness or sudden change in family situation (e.g. sudden death of a family member). Having both emergency and investment opportunity fund will mean that one has "bought insurance" for his stock investment. In the event of any emergency in the life of an investor, he need not liquidate his shares at a wrong time (especially in a down market) to raise fund to meet the emergency. When a down market is presented, an investor having opportunity fund will be able to invest upon such down market opportunity buying undervalued stocks and will not miss it and thus be subjected to the volatility of the stock market playing out on him.
Thus, an investor has to ensure he has "bought insurance for his investment" by setting aside an emergency fund and also an opportunity fund. I found out that there are approximately three to five profitable chances in any year based on compiled statistics of historical stock market behaviours to invest in stocks yielding good reasonable returns. The more times one invests in a year in excess of five times may not guarantee good profits. This means that an investor has to be very patient to observe the stock market every year to invest for only up to a maximum of five times in any year. The rest of the time in any year is spent observing for a good moment to invest.
This is pretty much like fishing, waiting for the fish to bite the bait. In this case, the bait is the amount of opportunity fund one has set aside while the fish is the valuable stock one is eyeing for to purchase at an undervalued or reasonably valued price in any year. There may be only one good opportunity to invest in any year to catch a stock at its undervalued or reasonably valued price. There may be a few more opportunities to catch the same stock at an undervalued or reasonably valued price in any year. However, there is no such thing as a great value every day for the same stock. Even if one is a trader, he also knows his boundaries to stick to his trading signals and trade only when opportunities arise.
Since there is so much uncertainty in the stock market due to the European debt crisis, slow recovery of the US economy and slow down in China's economy, one must be ready with opportunity fund which will be his insurance to protect against any potential swings due to the volatility of the stock market which is affected by a myraid of economic events worldwide. When a down market does arise, he will be able to exercise his insurance (opportunity fund) to buy up undervalued stocks. Even if such down market does not arise any time soon, the investor can sleep well every night knowing that he is insured and will be able to purchase into undervaled stocks with an adequate opportunity fund set aside whenever the down market arises.
The stock market will always continue to be volatile due to the different sentiments of many stock market investors. There will be highs as well as lows. With insurance (an opportunity fund) set aside, an investor just need to be a fisherman patiently waiting for his fishes (stocks) to bite the bait (to become undervalued) so that he can reap a harvest of fishes (buy into undervalued shares of companies). This opportunity will surely come a few times in a year. Just be patient to have an adequate opportunity fund ready to insure against such down markets and exercise this insurance (opportunity fund) to purchase undervalued shares without feeling the stress of having to face a down market while not being able to invest into undervalued shares.
Not having insurance creates uncertainty. However, it is also no good to be over insured. Cash on hand depreciates in value with time. Thus, one has to have an adequate amount of opportuntity fund but not in excess so that one is over insured and under invested. Cash can only grow in value while being invested. The value in holding cash is for emergency use, opportunity fund for investment or some personal immediate uses. Holding too much cash is not going to act as insurance but on the contrary is depreciating one's networth by the day.
Have you bought insurance today against the volatility of the stock market by having enough emergency fund and opportunity fund (to capitalise into investment opportunities when presented), but not in excess (being over insured and under invested)?
There will be "rainy days" (stock market lows) in the stock market in any year. Having enough insurance (adequate amount of emergency fund and opportunity fund) will allow one to capitalise on that few investment oppotunities (during stock market lows) in any year and to sleep well every night while waiting for that rare few investment opportunities to be presented.
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