The coronavirus pandemic has kept millions of workers home and shut down businesses all over the world. Unemployment rates stood at a multi-decade low of 3.5% in February and are now expected to reach highs of 17-18% by the summertime. Although most of you have probably lived through the 2008 recession, this current downturn is far worse as it is hitting us much faster; social distancing has the potential to negatively impact all sectors of the economy. Although Trump wants businesses to re-open in May, only the pandemic can decide the fate of the economy. Covid-19 has made the market see highs and lows I’ve never seen before. I check the market everyday and right when I think we’ve bottomed out or a certain stock is going to start doing well, and they just suddenly tank. I have compiled ten basic tips to follow when investing in this volatile market:
Build your emergency fund
We still don’t have a vaccine developed for coronavirus and scientists expect it to take a whole year. No one knows how long social distancing will last and if there will still be limitations to public gatherings that will extend into the summer. It is important to stash away money to get through these hard times in case you get sick or lose yoyr job. Experts generally recommend setting aside 3-6 months’ worth of living expenses to cover for medical bills, downsizing and unexpected expenditures.
Where do I put my emergency fund? People generally choose to stow away money in savings accounts with high interest yields. Compare offers by different banks to find the account that suits your needs best!
2. Watch out for volatility in the market
With Covid-19 taking control of the market, it has become extremely volatile. The market doesn’t favor uncertainty as the stock market relies greatly on predictions and trust in companies. If people believe that a certain company is going to do really well, the company’s stock prices will rise in response; if people forecast low revenue streams for a company, the company’s stock prices will dip. However with the pandemic taking over the global economy, all companies have hit a low. Even the smallest good news causes a great surge in stock prices and trade volume.
If you want to invest during this time, you have to be ready for extreme changes in price and volume. There is definitely a lot more risk as like I mentioned earlier, there are a lot of unknown variables: When will we reach the peak of coronavirus cases? When will we find a cure/vaccine? When will shelter-in-place end? Unless we’re able to find an answer in the near future, drastic fluctuations in the market will continue to occur and it is our responsibility to search for trends in customer behavior as well as changes in business operations.
Some good news though is that history has shown that over longer periods of time, the stock market beats all other asset categories so if you have a long time horizon, don’t worry too much about the current state.
3. Watch the news
Although most of you are probably sick of watching the news by now because of all the talk about the virus, news updates can be a great source of information on how the stock market will behave. President Trump has been releasing daily statements about the government’s response to the pandemic and their efforts. He recently approved the $2.2 trillion stimulus package (CARES Act) to help businesses directly as well as offer relief for American households. Stock prices of many companies increased following the bill. However, it is important to note that the market usually works with future expectations. For example, although first quarter reports are coming out in April, there isn’t high volatility because stockholders have set very low expectations of companies. We’re in trouble if company performance continues to extend into the third and fourth quarters. Follow channels like CNBC, Cheddar news, Bloomberg Television, and Fox Business to stay updated and prepared.
4. Understand changes in customer behavior due to Covid-19
Although most companies aren’t doing well during the pandemic, some businesses are flourishing as demand for their products and service drastically rise. When the economy falters, consumers typically cut back their spending on travel, restaurants, and leisure activities. Companies like Carnival went down by －63.8% and Hilton’s stock went down by －54%. On the other side of it, Amazon, Costco, Zoom are doing well because their business isn’t as affected by social distancing. Instead of going to retailers, consumers are buying online or hoarding supplies from Costco. Education and business meetings have been moved to platforms like Zoom; Zoom’s user count went from 5 million to over 200 million in the span of 6 months. Remember to take into account how customers are adapting to changes by Covid-19. Look for trends like how are people now talking to each other or how are people playing games or buying food. These small observations can be a huge asset when investing during Covid-19.
5. Find bargained blue-chip stocks
Blue-chip stocks are shares of established and financially secure companies that have been around for a while. These stocks typically are well-known companies and stable investments as they have consistent cash flows and dividends. Blue-chip stocks are usually the first to recover from bearish markets and recessions. Examples of blue-chip stocks include Apple, Disney, Facebook, and Boeing. Companies like these tend to always be part of indexes like S&P 500 or NASDAQ. Since blue-chip stocks unfortunately aren’t invincible, they also are hit by recessions. For that reason, their stock prices are going down during Covid-19, but again like I mentioned earlier, they are most likely to make a speedy recovery. Most investors like to buy these stocks at a bargain and then reap the profits during immediate bullish trends.
WARNING: although most blue-chip stocks are a good buy, some are just bad choices. Before the 2008 recession, Lehman Brothers was the fourth-largest investment bank in the United States. In 2008, due to the continuing house-market crisis, they eventually filed for bankruptcy and the company went under. It’s important to remember that although safety from the volatile market can be predicted, it can never be assured.
6. Search for pharmaceuticals or biotech companies
Regardless of how fast or slow the pandemic spreads globally, it isn’t going to change the fact that those affected by this disease need ailments and medicines. This creates a steady stream of revenue for most healthcare companies and especially drug developers. Everyone is on the search for developing a vaccine or cure and every small good news by these companies results in large spikes of their stock prices. Even looking outside of coronavirus, other diseases haven’t been suddenly cured. Cancer medications are still in demand and are going to stay consistent with this pandemic.
7. Commodities
Gold is usually the safest bet against inflation and volatile markets. When value of American dollars decreases, value of gold increases or retains value. Gold is uncorrelated with other asset classes and has a record of always storing value. It is up to you whether you want to buy gold-mining stocks or the metal itself as it really depends on your risk profile. Those who go for gold-mining stocks are attracted by individual stock dividends and individual responses to outside stimuli. Crude oil is another commodity that interests most investors. It is considered an essential commodity as it provides energy and petroleum products to the global market. Although crude oil prices have fallen almost 70% since early January and are at record lows, oil is an essential commodity and helps run various sectors. Oil prices are at massive discounts right now and the best-capitalized companies will definitely have high returns once the pandemic is over. It’s really risky because we don’t know which oil companies will make it and which won’t. When investing in oil, it is important to watch oil’s global standings as well. Prices after the meeting with the President of Russia and King of Saudi Arabia increased by small margins; although they agreed to cut production, oil prices didn’t rise a tremendous amount because investors were confident that this compromise would be settled. If neither countries decided to cut oil production then there would be issues. Different commodities have different risk levels and so find what works best for you and your financial stability.
8. Bonds and Hedge-funds
Bonds might not return as much as stocks, but they have various benefits. Bonds are definitely more stable as they are less likely than stocks to lose money and can reduce a portfolio’s potential losses. Since bonds pay interest regularly, they can help generate a steady flow of income. Next to cash, treasury bonds are the safest and most liquid investments. These come in short and long-term so it depends on how soon you need your money. Certain bonds such as municipal bonds are tax-exempt. These bonds usually pay a lower yield but may provide higher after-tax income to wealthy investors in higher tax brackets.
9. Average down
Be aware of the falling knife syndrome! This is when you think you have predicted the lowest you think the stock or market will go and then BAM! It tanks again but you can use the law of averaging to protect yourself. Averaging down is when an investor buys more of a stock as the price goes down. This way you can build a position with a lower average purchase price. Averaging down also ensures a lower break even point for the stock position. It makes sense to average down when you think the stock will bounce back up or have high yield. If one were to go all in at once, they are more likely to lose all that money due to unexpected volatility. Here’s an example: let's say you buy 100 shares at $100 per share for a total of $10,000. The stock then drops to $80 per share. You then buy another 100 shares at $80 per share for a total of $8,000. You now own 200 shares for a price of $18,000. The average price per share that you own is $90. If the stock rebounds to $120 per share, then averaging down would have been an effective strategy as will have spent $18,000 rather than $20,000. If the stock continues to fall in price through, you will have saved $2,000 of potential greater loss.
10. Avoid investing in highly leveraged companies
If a company is highly leveraged, they have a high level of debt and are at greater risk of bankruptcy. Again risk of bankruptcy doesn’t mean they will definitely go under but there is a higher potential of that happening for these companies. Most highly leveraged companies are growth companies and when they enter a recession, they generally don’t have enough liquid assets stowed away to cover them. Recessions are their biggest enemies as management is fairly poor for these companies during these times. There is less flexibility for debt-ridden companies and mismanagement is very common as high interests rates usually short-sight CEOs and board of directors.
These are just a few tips and I hope they help you all navigate your investment portfolios through these hard times.
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