Investing During Crisis: Tips to Ride Through the Volatile Territory

  • May 26, 2020 AEST
  • Team Kalkine
Investing During Crisis: Tips to Ride Through the Volatile Territory

Summary

  • Financial markets recovering as COVID-19 subsides. Recessionary scenario anticipated with some sectors and financial instruments safer for investment than others.
  • Investors must look at company fundamentals before panic selling. Low prices present profitable buying opportunity, keeping a long-term horizon in mind.
  • Investment in and diversification across healthcare, consumer staples and technology sectors, that are particularly doing well in the times of crisis, is considered to be more rewarding and safer.
  • Lessons can be learnt from previous bear market phases to make the right investment choices to weather the market draw-downs better.

As the coronavirus pandemic kicked in at the onset of the year, global financial markets moved into a panic mode. The markets, however, started showing some signs of stability and recovery through the month of April 2020, as governments across the world released huge liquidity injections to support businesses and households and keep the economies buoyant.

Given the extraordinary circumstances and high level of uncertainty, various market experts have been fearing a recessionary scenario, which usually stems from abrupt declines in spending. This does not necessarily imply that one refrains from investing in turbulent times, as even in a market downturn, there are some sectors and financial instruments that are safer than others.

For investors, it has been a challenging phase to determine the good time to buy more at the lowest point of market or sell at the top due to extensive market volatility. While the timeline and scope of recovery across the global markets remain debatable, following investing tips could come handy, as investors try to protect their nest eggs, even boost their portfolios with the right investment picks or simply re-evaluate their investing strategies.   

Do not be swayed by the stock price, study the business, and decide based on fundamentals being strong or weak

The most important attribute to have in the stock market is not intellect but the right temperament. When calamity strikes, most of the investors let their fear instinct get the best of them, as the thought of losing money is much more intense than the desire to gain. So, while most investors panic in stock market crashes, those with a cool head and a long-term investing horizon are able to view low prices as a lucrative buying opportunity.

In crisis, fear and negative market sentiment drives the prices of assets much below their fundamental or intrinsic values. This provides the chance to opportunistic investors to buy some great stock market gems and patiently wait because the history suggests that, optimism returns, and prices bounce back to where they were once the dust clears.

Thus, crisis brings a unique opportunity to double one’s wealth in short bursts like no other. Now, buying may look like the profitable thing to do, but it is very important to study the company business and decide based on the strength of its fundamentals. Fundamental analysis helps in determination of the health of a company and whether the current stock price reflects a value way below the one represented by the fundamental factors or the ongoing market sentiment suggest. If yes, then the stock is perhaps a good investment opportunity.

Some quantitative fundamentals include balance sheet, revenue, profits, losses, statement of cash flows, debt level and all of the measurable characteristics of the business. While business model, competitive advantage, brand value, proprietary technology, etc., are qualitative factors to consider while looking at a company.

For example, ASX-listed global fintech player Afterpay Limited (ASX: APT) is up 74.77% (4x) in the last one month, as on 26 May 2020. The Company has been an early adopter of Buy Now, Pay Later services, with a very attractive and unique business model. For the March Quarter 2020, Afterpay recorded a strong performance across all its business segments with underlying sales of $ 7.3 billion YTD, growing by a huge 105% relative to the prior corresponding period (pcp) in FY19, demonstrating resilience and strength amidst the crisis.

For More, Read: The record high levels for BNPL Stock Afterpay: The Market Darling Amid crisis! ;  Blue Chip Stocks on ASX amid COVID-19 Pandemic: Lens at BHP, RIO, MQG, ANZ, CSL

Study non-cyclical sectors, stay updated with business commentaries and diversify

As most options may be risky in a recession scenario, it is important to play it safe. Presently, sectors like healthcare, consumer staples and technology are particularly doing well as they form an essential part of human lives now and their goods and services are in constant demand through the year.  

At the same time, it is imperative to practice due diligence here, probably via keeping a track of monthly or regular business commentaries and quarterly updates by the sector players. It helps in gaining a clear picture of what is happening with the business and to what extent are their austerity measures successful in coping with the crisis. Diversification is the best hedging strategy against losses and advocates spreading the investment across commodities (precious metals), stocks (dividend stocks), and different sectors to protect one’s portfolio.

Study Past Market Crashes- History Teaches You Valuable Lessons

There have been a number of Black Swan events in the past and the fact that we are discussing lessons from them is a testimony to the fact that markets did survive and recover from those crashes sooner or later. Some of the historical stock market crashes include the Great Depression (1929), which was a distant event with very few having witnessed it, Post World War II (1946), interest rates hike and rise in unemployment (1980s), bursting of the dot com bubble (2000) and of course the most recent collapse of the US housing market (global sub-prime crisis) in 2007-08.

Volatility is the inherent nature of a market and so are crashes and rallies. During crisis like COVID-19, it is helpful to learn lessons from the past events. For example, sub-prime crisis taught us that diversification means more than just stocks and bonds as the prices of stocks, bonds, housing, and commodities simultaneously went downhill during that period. In such times, only cash could have been a saviour. For those, who don’t understand and have low appetite for risk, should be satisfied with what they have while keeping a long-term horizon in mind. Such investors should also look at rebalancing their portfolios to remove all risks.

Interesting Read: Developing Antifragility was Essential Pre Covid-19; Now It Is A Must- Taleb Your Go to Guru

Invest for The Long Term

“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $ 800 and go to Las Vegas.” - Paul Samuelson. The most simple and advocated way to survive market crashes is keeping a long-term view and holding onto to good securities. Historically, long-term investments always outperform the market and the investor is able to ride out the highs and lows of the market to ultimately generate a positive return.

Some of the other benefits of long-term investing are- it eliminates emotions out of the game, one take advantage of compounding to a large extent, one can rectify their investment mistakes, no transaction costs involved, investment risk obviously drops and of course, one can sleep better at night than those active traders who always have to be on top of the market.

Good Read: Guide to Portfolio Strategies and Investment Avenues to Wade Through COVID-19 Crisis

 


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