During the coronavirus outbreak of 2020, the markets have responded wildly. At first, markets were bullish on the all time high of 2019, a year with one of the highest growths in history.
However, as COVID-19 grew to become a global pandemic and travel was shut down, stock markets crashed drastically, resulting in one of the largest drawdowns in history.
With the lock down, many businesses were forced to close, putting millions into unemployment, resulting in one of the worst unemployment rates since the great depression.
However, massive funding from the federal reserve reversed this dip, causing stock markets in the US to recover to all time highs after just about 3 months. If you've bought during the dip, you would have experienced returns in the short term of up to 40%!
Let's take a look at some learning points for investing during this coronavirus pandemic, an event which came suddenly and had never occurred in history before.
Markets can be disconnected from the economy
Perhaps the most salient of points is how the markets performed during the pandemic. In another article, we examined how the US federal reserve stepped in to introduce heavy handed measures to boost the failing economy.
These measures include dropping interest rates to zero to encourage borrowing of money, and the supply of cash flow to banks and businesses amounting to trillions of dollars.
Even as we were hit with news of all time high unemployment claims, and reduced spending due to businesses having no customers thanks to lock downs, the market rebounded rather sharply once the federal reserve's measures started kicking in.
All this shows how the markets can be disconnected from the economy. Trying to predict how the market will move based on economic news is not a wise idea.
Don't gamble, invest
The markets shift based on many factors, including investor sentiments and government policies. It would be sheer idiocy to say that one can predict price movements with any reliable accuracy - you would be the richest person on Earth.
No one can predict prices. Reacting based on news you've read is a sure way to be swept up in the volatility of the markets. Even now, as the economy is recovering, random news like a brewing India China trade war can cause impacts suddenly even in a post COVID recovery environment.
There is simply no telling what comes next. Importantly, an individual investor has to realize that investing is not supposed to be a gamble.
We shouldn't be buying into assets because of hype or some news we've read, but because we truly believe in their business model and their fundamentals. In that way, we protect our bottom line while standing to gain in the long term.
The reasoning is simple - a good business have two big things going for them. Firstly, their product and their markets are important and sustainable. That means there is a demand for their goods and services even in the long term.
Second, their management and fundamentals are good. This means they know how to manage their business well and are producing profits befitting of their good product. This also means that they have a better chance of navigating white water rapid environments like the coronavirus economic dip.
While tough times can cause a lot of uncertainty and complications, there is nothing better than a good business to ride out said uncertainty and last the test of time.
Long term wins over volatility
The truth is, in the short term, markets experience a lot of volatility. Even in the most stable of assets, it is often hard to determine if any sudden news or event will shock prices to change all of a sudden.
As most things are in life, we still advocate a long term view of things. Again, a good business will continue to grow years from now, while a risky business might not do the same.
If I had to make an analogy, it would be like sitting on a roller coaster. There are ups and downs on the ride, but in the end, you'll make it back alive (if you're on a good roller coaster).
Similarly, there are many ups and downs along the way in investing, but if you ride them all out, then you'll be better for it. If you had hopped on a high, good for you, but imagine if you bought in at a high and hopped out at a low. That wouldn't be so nice, would it?
As the saying goes, it takes many years of work to make a great performance, but only one mistake to mess the whole thing up. You can't always guess correctly.
Taking a long term investment view gives you the luxury of growth and time. With growth, you let the asset you invest in grow over time with their good business model and fundamentals. This nets you an increasing amount of profit over time.
With time, you gain the luxury of having choice. Instead of being forced to buy and sell on less than ideal terms, you have utter control over when exactly you choose to reap your profits.
If you imagine money that you invest going into a piggy bank, then you have control over when you choose to open up the piggy bank. Instead of worrying about when to crack it open, you can just keep putting money in and open it when you're finally ready to retire.
Ideally, you want to open it at a point in your life where you have financial stability and ready to retire to reap the most benefits from your investment.
Diversification is key
During the coronavirus pandemic, many asset classes took a huge hit. REITs and real estate in particular suffered quite a bit due to rental payments being waived due to lock down measures.
We also saw stocks crashing with one of the largest drawdowns as investors flocked to safe options like cash and gold.
Again, as unexpected events occur in the markets, various asset classes are affected in one way or another.
Although we could theoretically invest purely into a single asset class and get away with it, this could hurt our returns in the long run since you miss out on plausibly better returns from other asset classes.
If you're retired or close to retiring and are overly represented in a single asset class, you also expose yourself to a lot more risk that could hurt your retirement plans if that asset class suffers a large hit like REITs did during this pandemic.
The main goal of investing is to be financially free - and that applies no matter what events may come. You're not truly financial free if you lose control over your lifestyle because an unexpected event hit. You're just at the brink of it.
To prevent such risks, it is important for us to diversify our portfolio to hedge against our portfolio becoming unsustainable for our financial needs, and also to give us broader exposure to more markets in order to capture unexpected returns from various sources.
Check out our articles on diversification to learn more!
Stocks are still king
Even though diversification is important, you may often find stocks making up a large portion of your portfolio. This is because even in economic crisis such as these, stocks are still the king of all asset classes.
Among the asset classes, stocks have one of the highest rates of returns, and also bounce back to the most strongly after an economic crisis. As such, the long term prospects of stocks for growth and income and extremely attractive to investors.
Of course, as you move closer towards retirement, you'll want to move slowly towards safer asset classes like bonds and gold, but if not, then stocks are hard to beat for their returns and relative long term potential.
In this coronavirus pandemic, we see the stock market jumping back to all time highs just a few months after the dip simply because there were no better option for investors to pick.
Gold, cash and bonds, while safe, provide less than ideal returns and you'll want to move to riskier assets to increase returns in the long run.
Of the remaining assets, stocks are crucial in an investors portfolio since they represent portions of companies and are thus intricately linked to a business model. If the business doesn't fail, then the stock won't fail - and there are a lot of good companies out there.
Tech stocks are the new market
Speaking of stocks, the technology sector is now the safe haven of the industry. Throughout the pandemic, we see the importance of technology in our lives as meetings were carried out over the internet and people started working from home.
Many investors these days recognize the importance of technology in our lives. Every app in our smartphone, every computer we use - technology is now so intricately linked with our lifestyles and work that it has became inseparable from us.
As such, during the coronavirus dip, we see tech stocks bouncing back stronger than ever, reaching all time highs just weeks after the dip as their products are still being used by people even in uncertain environments.
This has resulted in investors fleeing to tech stocks as the new safe haven during uncertain environments.
In fact, in the US, tech stocks make up the majority of the market in value, including big name giants like Amazon, Google, Microsoft and Facebook. In essence, the market is nearly being over-represented by tech stocks in itself.
This results in a large problem. If the market becomes over-represented by tech stocks, then the market will fail to become diversified enough to regard it as a measure of a nation's economy.
Here in Singapore, we also see our markets over-represented by financial stocks and banks.
This means that buying into ETFs that track the market become less diversified than you might think - you might just be buying an over-sized sector and overexposing yourself to a particular industry.
With all that said, the future of tech stocks are looking pretty bright, and as technology continues to dominate in our lives, they will keep being indispensable, and a good place to invest into.
Bet on the future
Safe to say, as long term investors, we must look at long term targets. There is no better place to put our money into than the future.
If we're choosing the things that we want to invest in, then nothing is going to give us returns than what will be relevant to us in the future. This means reading up on how our society is moving and progressing.
Both during the coronavirus pandemic and before, we see a paradigm shift towards technology stocks. Technology is, after all, the future.
Similarly, it might be wise for us to look at future technologies to see where we should be investing into.
These could include fields in artificial intelligence, sustainable energy, or even space ventures and communications (5G). As Earth's resources become more and more limited, we could see sustainable farming become a burgeoning industry too.
Times are changing, and as investors, we want to put our money where we see the future is moving to.
Buy the dip
When we talk about a recession, or a dip, the topic often changes from "should I sell" to "when should I buy".
After all, a recession is one of the best times to buy in - you're essentially getting things at a huge discount, giving you almost guaranteed returns if the things you buy simply recover to normalcy.
Yet, it's often unclear when to buy in. On one hand, you are worried that you will lose money when you buy as prices drop even lower. On the other hand, you are expectant that it will go even lower, and with your limited capital, you wish to wait for better returns.
Both of these mindsets are detrimental to investing.
Again, no one can predict how the market will shift on a day to day basis. Not you, not me, and not even Warren Buffet.
A smarter idea would be to build a plan and stick with it. For dips, dollar cost averaging seems to be the easiest way to take your emotions out of the equation.
Assuming you have limited capital, portion your capital into three portions (or less) and set corresponding price points for an asset that you have your eyes upon.
Whenever that asset drops to that price point, buy in with that portion of your capital. Continue doing so if it drops further, until you have exhausted your capital.
For example, if you had $9000 to invest, you could do something like this:
|Price point||Amount to invest|
Thereafter, don't think about it any further. If you have done your research, then you can almost be assured that the asset will eventually recover. Selling it immediately in search of higher returns is not giving your chosen asset time to grow, and is just a waste of your time and energy.
Don't time the dip - buy throughout the dip. In this way, you almost guarantee yourself discounted prices and hence high returns, while not beating yourself up too much on missing the dip.
Our true goal
Perhaps the most important lesson I learnt through this coronavirus pandemic is the importance of our mental state of mind.
As long term investors, we are investing to grow our wealth to remove a stress point in our life - financial instability. We want to be financial free to do whatever we want to do.
Perhaps the coronavirus pandemic where many job layoffs happened have only solidified this goal for us.
At the start of the coronavirus pandemic, I was reading up on the markets every day and thinking of where to invest. Halfway through however, I was more focused on my own state of mind.
Did I invest to be stressed about it? Or did I invest to help me remove a stress point in life?
Investing is supposed to be boring, like watching paint dry. If you're getting a high from investing, then it's no longer investing, but gambling, which is highly risky and not at all what we want.
Of course, that is not to say that you shouldn't enjoy investing. It can certainly be rewarding watching your money grow and certainly be scary watching your returns take a nosedive.
But in the end, investing is simply another way for us to grow our wealth. If we have to spend so much time on it that we neglect the people around us and ourselves, then it's no longer something that benefits us but something that harms us.
Similarly, if you're taking investing to be a gamble and investing in risky things to achieve over-sized profits, then you too might be hurting yourself in the long run instead of letting investing benefit you.
Let your money work for you instead of you having to work for your money.
I found this nice saying online:
Money comes and goes, but time only goes.
There's a lot more to life than money, so remember to spend time on those and on yourself too. You don't have to scrimp and save every dollar and deprive yourself of experiences to be financially free.
You don't want to be rich, only to have no energy or purpose left to enjoy that richness. We want to be rich and happy.
As the pandemic continues, focus more on yourself and the people around you and make sure we are all staying safe and happy. That's what's most important in life.
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