The global stock market has taken a beating due to mounting fears of economies slipping into recession due to coronavirus pandemic. Consequently, forcing investors to pull out their money through massive selloffs to cut losses.
As per market experts," Coronavirus pandemic has swept away almost one-third of the global market cap."
In a bear market scenario with government yields on record lows, plummeting oil prices, supply disruptions, weakened consumer sentiment, widespread quarantines and governments messing up their public-health responses to COVID-19 has shaken the confidence of investors and sparked panic across the world.
A coordinated action taken by the governments and central banks all over the world can help in restricting downside of the market to an extent. The extent and duration of the virus are still unknown, which is the leading cause of fear in investors.
Formulating an investment strategy in such a turbulent scenario is a challenge. But there is never a surety in the stock markets. Market volatility is something for which investors must be prepared in advance.
Nevertheless, below are few tips that must be kept in mind while hunting stocks in a lockdown scenario.
A good mix of investments is a must while building an investment portfolio. A diversified portfolio helps in managing risks and benefits from long-term value. An investor must consider investing in low-cost index funds or ETFs that gives him exposure to a broad range of stocks.
Volatility is something that investors must be prepared for as cases for coronavirus continue to spread. Hence, investors can start investing small amounts by diversifying across asset classes and sectors like bonds, equities, cash and gold. One must keep in mind that predicting rain doesn't count but building the ark does.
A balanced portfolio helps a lot during uncertain times. However, an investor must know his tolerance for risk and build an investment portfolio around that.
- Don't chase stocks
When investing, do not let the price of shares dictate your buy and sell strategy.
The global economy is on the verge of slipping into recession. A lot of companies are facing a credit crunch which could cause financially leveraged companies dependent on capital markets to go bankrupt.
Most people tend to follow herd behaviour while buying stocks. The time to get interested in buying a stock is when no one else is. An investor cannot procure that is prevalent and then do well.
Cheap stocks can get cheaper and further decline beyond your expectations. An investor must keep in mind that the future is uncertain, and the range of outcomes is wide.
- Consider potential structural changes in business
Structural changes refer to shift in the way an industry or market operates which is brought about by any significant economic and political developments, change in resource availability, changes due to supply and demand of all resources and shifts in the capital pool.
The coronavirus pandemic can put a halt to businesses that don't have a financial means to survive a few months of significantly lower revenue. While some tenants will be late in paying their rents, others may go out of business altogether. Piling up of stocks by people in quarantine can change demand and supply behaviour of specific industries. An investor must keep this in mind while investing in a company's stock.
- Make efficient use of time
As of now, people have more time in their hands due to the work from home facility provided by the organisation they work for during the time of quarantine, they must devote more significant time in studying company financials and the kind of stocks to invest in.
Assessing the quality of the Company, modelling its financials and estimating the intrinsic value of the company are some of the skills of a good investor. As per market experts, an investor must differentiate between the Company whose shares have fallen due to market panic ripple effect and those that sold-off due to larger gusts faced by a coronavirus."
Amid the low interest-rate environment and coronavirus pandemic, pharmaceutical, consumer staples and utilities industry can be safer bets in such an environment.
- Invest for long term
Investing in a longer-term implies the end of worries about buying the shares cheap and selling at a high price. Buy and hold strategy for a longer-term helps investor to save for retirement and everybody from rich, poor, risk-averse and risk-hungry as well.
An investor who invests with the purpose to reap returns in the long term could have some brilliant opportunities when the stock market is turbulent.
However, an investor must guard himself against any emotional mistakes like lack of patience, business pressure to generate returns and scarcity of time to do appropriate research.
During the market downturn, emotions tend to overpower your time horizon. The time horizon extends from 5 years to 10 years to more while it can dwindle to months and then weeks at the time of collapse. An investor must not invest capital in the stock market that they think they will need for the next three or maybe even 5 years. Value investing supports a long-term time perspective.
Hence, an investor must avoid any sudden emotional move due to a drop in the markets and focus on devising a diversified risk portfolio with long-term goals.
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