How to Survive a Market Valuation of Your Assets

Market valuation or market capitalisation has a significant influence on any investment portfolio. It indicates to fund managers and financial advisors which funds or stocks are suitable for long-term growth. Markets are volatile and unpredictable, and valuation helps to predict which companies are established and reliable.

What is Market Valuation or Market Capitalisation?

Market value is the price an asset would cost in the market. This is based on the price buyers would be willing to pay and sellers willing to accept for the asset.  A high market value often indicates a high demand for a stock because investors are optimistic about its performance in the future. Market value in publicly traded companies is known as market capitalisation – outstanding shares times the share price. For example, Apple has the largest market cap globally at $3.5 trillion, followed by Nvidia at $3,2 trillion and Microsoft at $3.11 trillion. In fact, the top twenty largest companies by market cap are American apart from Saudi Aramco in 6th place at $1.753 trillion, TSMC in Taiwan in 9th valued at $970 billion, Novo Nordisk based in Denmark in 17th at $522 billion, and Tencent in China coming in at 19th at $493 billion.

Why is Market Valuation or Market Capitalisation Important?

Market value is essential, as it provides a concrete method that eliminates the uncertainty to determine what an asset is worth. Market cap represents the presence of a company in the market. The higher the market cap, the larger the presence, like Microsoft and Apple. These market giants are seen as established companies with efficient, reliable organisational and management structures that generally offer good returns with less risk than newer companies. Market cap or value, often indicates valuable quality stock that should perform well in a portfolio. Many investors choose these large market cap companies as suitable long-term growth investments.

Large-cap companies have been around much longer, are more established, and tend to offer lower investment risk, versus small-cap companies that are younger, more volatile, and in their emerging phase, which could present a higher risk but also possibly higher returns.

 An investor will typically decide on the level of risk they are comfortable with, such as conservative, balanced, or growth, for example.

How does Market Cap or Valuation Affect your Assets?

If part of a financial portfolio is invested in large-cap (e.g., Netflix, Paypal) or giant-cap (Microsoft, Amazon) companies and these companies increase in value or market cap, the shares held in these companies will likely become more valuable, or profits will be higher. This, in turn, will increase the value of the investor’s portfolio. The ultimate goal of an investment portfolio is to build wealth.

If a company’s market cap or value decreases, the opposite happens. Share prices drop, and sometimes profits fall, resulting in an investment that loses value.

How do you Protect your Assets Against Market Volatility?

Avoid panic selling and buying – a typical response of investors when markets are volatile or take a dive is to sell off the stock. This sell-low strategy could be detrimental over the long term.

Diversify your portfolio – Ensure that your portfolio is diversified across various regions, asset classes, and sectors to mitigate any risk caused by volatility. Asset classes include equities, bonds, cash, real estate, and gold, for example. Regions could be the US, UK, Europe, Asia, South America, or even country-specific like the US, UK, Japan, or China. Sectors could include technology, energy, banking and financials, healthcare, and infrastructure, to name a few. Diversification even comes in the form of mutual funds or ETFs that track broad indexes. This is often easier than trying to build a portfolio from scratch.

Rebalancing your portfolio – Your financial advisor should regularly review and rebalance your portfolio to ensure your risk level and asset percentages remain the same. Consider it a tune-up or service of your investment vehicle to maintain optimum performance. This entails selling or buying assets to revert to the original balances. For example, a portfolio comprises 60% equities and 40% bonds. Over time, the equities perform above expectations, and the weighting of equities increases to 70%. An advisor will sell off some equities or buy more bonds to revert to or rebalance the original composition.

Portfolio rebalancing is essential to manage risk and improve the returns of a portfolio.

Use a qualified, experienced financial advisor – You wouldn’t get medical advice from your lawyer; you would seek out a medical professional who knows about medicine. It is prudent to leave your financial planning in the hands of a professional financial advisor who knows the markets and is experienced in financial planning. Someone who understands your individual financial circumstances and needs and can tailor-make an investment solution suited to your needs.

Market value and capitalisation are vital indicators that provide valuable data and help financial advisors select the right stocks for their clients’ portfolios according to their needs.

Please note, the above is for educational purposes only and does not constitute advice. You should always contact your advisor for a personal consultation.

* No liability can be accepted for any actions taken or refrained from being taken, as a result of reading the above.