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Tips for Safe Investments in the Current Environment

  • April 22, 2020 08:02 PM AEST
  • Hina Chowdhary
    Director, Equities Research Hina Chowdhary
    1378 Posts

    Hina Chowdhary is the Director, Equity Research at Kalkine and has an extensive experience of about 15 years in the area of Research, which includes 5+ years in Equities Research particularly.She has earned a Master of Science degree from the renowne...

Tips for Safe Investments in the Current Environment

Quite expectedly, all is not well in the market. The Australian markets have done reasonably well of late, but there is a long way to go before the economy gets back on track. There are chaos and speculations around how the market will perform in the current economic downturn due to the COVID-19 pandemic.

Despite the recent recovery of the S&P/ASX200 benchmark index, the returns on a YTD basis are still around -22 per cent, as on 22 April 2020. On 20 April, the index fell ~0.38 per cent in the morning session just ahead of a new survey by the Australian Bureau of Statistics on the household impacts of COVID-19.

The investors have no choice but to observe the market to get more insights on the economic impacts of the virus. It will be more evident in the coming weeks once data will start to come on the actual effects of the coronavirus outbreak. However, it is expected that there will be an increasing economic toll due to the lockdown restrictions.

What are the speculations in the market?

There are primarily two theories going on how the market will face this crisis. One suggests that as there is a sharp downturn due to the crisis, so will be the rapid recovery. It merely means that the negative impact will be a short-term pattern, and things will get back on track right after this passing phase.

The other theory says the present scenario could be a giant bear trap. This theory suggests that there will be significant business and economic damage, and it will have a long-lasting impact on the market as is the case with China's depressing 9.8 per cent economic contraction during the March quarter.

If the effect is for the long term, the shares are expected to follow a downward path, with 50 per cent of these shares possibly hitting February's low records.

However, going by the recent market trends, the Australian share market seems more in line with the first theory. It responds well to any positive piece of news like when President Trump unveiled guidelines for reopening of the US economy or when Gilead Sciences’ drug demonstrated promising effects on treating the coronavirus infection. The positive response was evident with Friday's market data where S&P/ASX200 closed at 5487.5 points with substantial gains of 1.3 per cent or 71.2 points.

Source: Pixabay

Advice to retail investors during the current situation

The stock markets have seen it all in the past: wars, recession, and epidemics. However, the coronavirus crisis is different from all those previous events, where there are lockdown and social distancing restrictions to curb the pandemic. As much it is essential to save lives, the lockdown is damaging for the market.

The uncertainty in the market is creating panic among the retail investors who are impulsively considering the option to cash out and exit. However, if you ask the market experts, they will advise you that over the long term this could be a losing strategy.

The general advice is don't be impulsive on selling your shares, instead hold your nerves. Selling out at low prices due to panic will most likely result in loses. Instead, focus on buying valuable cheaper stocks that have the potential to rise over time.

Preparing an investment budget is always crucial, but it is more significant in such times. There are useful templates and calculators you can use for planning your budget. While preparing a budget, do plan about emergency fund deposits, amounts for saving and investing annual expenses, and needs vs want.

GOOD READ: Guide to Build Emergency Proof Portfolio

Safe investment tips during COVID-19 crisis

Source: Pixabay

It is always recommended to have a long-term investment plan to achieve your investment and retirement goals. Such plans are more immune to the volatile markets. We all understand that the market downturn is a part of share markets, and as it falls, after the down phase, it is going to rise again. So, wait for the market to resurge.

In the current market situation, you mustn’t think of short-term plans. Furthermore, in such an uncertain market situation, you must avoid making reactive decisions. Such a crisis also gives an opportunity for safe-haven investing, such as investing in bonds and gold.

When almost all sectors are poorly hit due to pandemic, there are sectors whose values have gone up like protective gear manufacturers who supply gloves and face-mask, healthcare, and insurance. An investor should look for stocks in these sectors that are performing well in the current scenario and likely to remain attractive in the future.

Among the global companies whose values have increased due to the nature of the crisis include Netflix, Microsoft, Teledoc, Zoom Video Communications, Slack, and Peloton Interactive.

If you have planned well ahead for a market dip, you can also make money in such situation by buying stocks at low prices and holding the shares for long till the market stabilises and you get real value for your investment.

While buying any stocks in the current situation, go for a quality balance sheet, and robust business models. As an investor, you need to do a thorough assessment of balance sheets to understand that in case of an extended downturn, will the company be able to survive. Be extra cautious while looking for small-cap and mid-cap stocks in such turbulent times. It is always advisable to go for blue chips.

Diversification is another essential risk management tool in such times, and it helps you manage your savings and invest in different asset classes in strategically manner. You can choose from diverse categories of assets like Commodities, Equities, and Bonds & Forex.

While the market scenario looks a bit gloomy, making investors fear for what might be in store, a prudent approach with a long-term plan could work wonders.

ALSO READ: Guide to Invest in 2020 Bear Market

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