The COVID-19 pandemic brought down a lot of businesses and economies on to their knees. It had a major impact on all the sectors and industries all around the globe, and investment was no exception.
The pandemic created a havoc in the investment market. It was a nightmare for all the investors and shareholders. Most of them, lost a lot of their hard-earned profits, overnight. But that’s what investment market is all about-unpredictable outcomes. All you can do is, make the right bid at the right time.
So instead of being afraid of what you cannot control, invest wisely in something that you can and seize this opportunity to build a profitable investment portfolio. In this article, we’ll discuss about the different ways in which you can invest amid the coronavirus.
Do not Time the Market
A smart investor knows the simple rule of investing- do not time the market. It’s quite effective but not everyone follows this rule. Some people tend to believe in their own judgement rather than believing in what’s actually right for them. They log onto their investing accounts daily, to watch the stocks rise and fall, in order to find the perfect time for trading. This approach is termed as “market timing.”
“Market timing is when people try to get out of the markets at (what they think) is an opportune time, hoping to re-enter at (what they think) will be a better time in the future,” quotes Andrew Hallam who’s a financial expert and author of the best-selling book, Millionaire Teacher. “If anyone has a lump sum to invest, but they want to ‘time the purchase’ to coincide with when they think they’ll make more money, this is considered market timing too.”
According to the investment experts, it’s not a favorable move. Billionaire investor, Warren Buffett warns that the market timing strategy “doesn’t make any sense” and can be lethal to your financial success. Instead, he advises that the investors should ignore whatever is going on in the market and make regular contributions for the long-term investments.
He also adds- “I don’t think I can make money by predicting what’s going to go on next week or next month. I do think I can make money by predicting what will go on in the next 10 years.”
However, a lot of market investors and fund managers stand by the market timing strategy, trying to anticipate the best times to buy and sell stocks. But, it’s not really a winning move, unless they have a crystal ball or psychic abilities.
“Markets move quickly, and you never know when they’ll move,” quotes Hallam. “Nobody can predict, with any degree of accuracy, how markets will behave. Studies that track what experts say reveal that the world’s leading economists are no better at predicting the market’s direction than a group of chimpanzees.”
“Long term, markets rise during about 67% of calendar years,” says Hallam. “So just by staying in the markets, you would have trounced the aggregate returns of these experts, if they actually acted on their predictions.”
That brings that brings us to our next point: buy and hold your securities.
Buy and Hold
When the prices start to fall, resist the urge to sell everything, with plans to but the stocks again, once the market rebounds. Don’t forget, market volatility is normal: take Mr. Market for instance. One day he’s sulking in a corner. The next, he’s walking on air, boasting about his profits and achievements. Keeping a track of his temperament is a waste of time – so, the question arises, “what should you do instead?”
Simple, Ignore him. Your best option is to build a versatile investment portfolio of stock and funds, and then “buy and hold” for the long-term. Let “Mr. Market” run around with his never-ending mood swings – because you aren’t selling.
“The money is made in investments by investing and by owning good companies for long periods of time,” said Buffett when he was interviewed by CNBC in 2016.
Panic-selling is one of the major blunders you can make as an investor. Those who commit such gruesome mistake, often end up buying high or selling low. They also tend to miss out on the best trading days of the time, which are unpredictable.
In fact, according to some experts, panic-selling leaves investors in a worse off condition than staying the course. For starters, The Bank of America Merrill Lynch analyzed the stats about what happens to investors who sell at the first signs of market volatility. Their findings? Buy-and-hold investors outperformed the panic-selling investors in every decade, ever since 1960.
Obviously, most people feel awful when they see the numbers drop. But if you’re young and have just stared your journey, remember that you have plenty of time to recover from a market downturn. The aim is to build up consistent returns over a long period of time, not to find the “right” time to buy “rewarding” stocks.
“There’s a saying among savvy investors: the most important factor isn’t timing the market – it’s time in the market,” says Hallam.
Celebrate When Markets Plunge
Believe it or not, a downturn in the market is a moment of celebration for the young investors. According to the experts, it is quite beneficial for you. In the book, “If You Can”, written by leading financial theorist, William Bernstein, he states that when stocks fall, the investors pay less money to own a larger number of shares. So, if you invest on a regular basis, you can stockpile assets for cheap. And then again, when the markets rebounds, the value of those assets soar.
“If you aren’t retired or close to retiring, you are a collector [of] stock market units,” says Hallam. Warren Buffett says that “any net purchaser of stock market assets should actually prefer to see stocks fall, not rise. Over time, that allows such investors to put more assets on the catapult, while it’s in the down position. Then when the catapult launches, the investor makes a lot of money.”
Think of it as this way: when there’s a major market downturn, the stocks go “on sale.” Panic-stricken investors start selling off their stocks, triggering prices to tumble. For smart, young investors, it’s an opportunity to buy ownership in different businesses at a handsome discount. It’s why Bernstein says that young investors should “pray for a long, awful [down] market.”
With the current economic crisis, now is the best time to stock up and keep investing. Block out any unnecessary noise from untrustworthy sources like Mr. Market and try to make regular contributions assuming it is business in its usual form.
“Rising markets actually disappoint me,” says Hallam. “The longer it can stay in the down position, the better it is for investors.”
Invest Like a Honey Badger
A Honey Badger? Yes, you heard that right. It’s the most fearless animal on the planet, not because it has sharp fangs or claws – but because it “doesn’t care.” A Honey Badger stays utmost-focused on accomplishing its goals (which apparently involves catching prey), largely ignoring any possible obstacles including its own emotions.
When it comes to investing, be goal-oriented just like a honey badger – block out the unwanted noise and focus only on your financial goals. Of course, it’s easier said than done specially with the media screaming continuously in the background. So, below-mentioned are a few pragmatic things you can do to keep your ride, as smooth as possible during the pandemic.
Get yourself a Robo Advisor
If you’re done with trusting the advice of human beings, perhaps it’s time for you to switch to a technology. A Robo-Advisor is a digital investment service that can create a personalized portfolio and manage it for you. All you need to do is, answer a few simple questions created by the computer in order to understand you and your goals of investment, in the best possible way. After that, the computer will use an algorithm to generate a customized portfolio that is best suited for your financial goals and risk tolerance.
The Robo Advisor will conduct all the activities of monitoring and re-balancing your funds. With some Robo Advisors offering as many as 70 portfolios to choose from, everyone from new graduates to retirees can find something to suit their circumstances.
Once you’re satisfied with the proposed portfolio, you can set it and forget it!
Balance is the Key
The best way to defend yourself against the turbulences of the market is to build a balanced, diversified portfolio of low-cost stock and bond index funds. This approach is backed up by the experts as well. The Nobel Prize-winning economist, Paul Samuelson said that “the most efficient way to diversify a stock portfolio is with a low fee index fund.” Similar to what Warren Buffett recommends for most investors out there. This will allow you to gain more stability in your investment journey.
Automate Your Investments
We are all human beings and it’s normal for us to lose control over our emotions. So, it’s for the best to remove your emotions from the investing process. One way to do this, is to automate your investments. That is, you can pre-set regular transactions to be made into your trade accounts. By doing so, it’ll steer you away from the temptation to time the market or to act on your erratic emotions.
What If you’re Retired (Or About to Retire)?
Well, if you belong to one of the mentioned categories then its best for you to be always on your toes. A lot of factors change if you’re retired or about to retire. Obviously, a stock market crash would mean taking a hit to your retirement savings, and for ones, who have already retired, it could mean saying “Goodbye” to their current lifestyles.
However, your best defense would be to build a risk-appropriate, diversified investment portfolio of low-cost stock and bond index funds. Along with that it would be a great idea to put aside some savings in a high-interest savings account as a safe backup plan. Not to forget, like many things in life, it’s all about achieving balance!
Hopefully, now after reading the article, you’re feeling more relaxed and chilled about the economic crisis triggered by COVID-19. Maybe you even feel motivated enough to invest. But remember, when the markets take a downturn, stick to your strategy: don’t time the market and don’t sell your shares when things seem to get out of hand. If you find yourself having trouble in controlling your emotions, use a Robo Advisor.
Finally, remember that the hard times present life changing opportunities for young investors to kickstart their investment portfolios. Warren Buffett once said, “Be fearful when others are greedy, and greedy when others are fearful.” And now are fearful times!