The impact of Covid-19 has been felt significantly in the global markets with share prices rising and falling and the environment for investors continuing to appear fragile. The pandemic has had a significant impact on stocks across most sectors, which presents a level of uncertainty and a vast range of opportunities.
These unpredictable times can bring a large variance to investing behaviour. New investors are considering entering the market to take advantage of lower prices, while others are looking to sell in order to put stable cash back into their pockets. No matter whether it’s a seasoned investor or someone thinking of dipping their toe into the market for the first time, the main question on each of their minds is, “Should I be changing my strategy to invest?”
It’s easy to react to headlines and panic when exceptional events like this pandemic occur, however, a measured and considered approach to an investment strategy is likely to be more rewarding.
Are you trying to catch a falling knife?
If you’re a newbie who’s contemplating investing for the first time, you’re likely trying to time the market and pick the bottom. Although we’ve seen dramatic drops, it’s likely the selling isn’t over. Experts refer to this type of investment behaviour as “catching a falling knife”.
Buying into a market with a rapid drop can be dangerous, just like catching an actual falling knife – it’s risky and you’re better off waiting until you know it has fully dropped onto the floor. If timed correctly and an investor buys at the bottom of the market, a significant profit can be made as prices recover. The real risk is if the timing isn’t right and you end up with many more considerable losses before any gains.
The unpredictability of the virus means that it’s hard to analyse trends and predict the bottom without technical indicators and chart patterns to support the momentum of the market. Announcements from central banks or government authorities taking measures to control the virus aren’t the saving attributes the market needs. It’s likely we won’t see significant changes until health authorities announce the outbreak has peaked or a cure has been found, which means it could be several weeks or months until business returns to normal.
When deciding on whether to invest or not, it’s important to consider your tolerance for risk and overall investment goals. In a volatile market, investors can be particularly at risk of allowing emotions to get in the way of sound judgement. Overall, playing the market based on short-term volatility is a lot more risky than playing the long game.
No-one knows what will happen in the short term – but if you have your asset allocation right, and hold quality investments, you are likely to be better-placed over the longer term.
Are you considering selling at the bottom of the market?
With so much uncertainty around the COVID-19 pandemic, some investors have felt safer on more stable ground and have cashed out to avoid any further losses. But if your portfolio is bleeding red, taking your money out limits any future growth.
Research indicates that investors who sell out at the bottom of the market and buy back in when the price begins to recover when they feel more comfortable (for example, once the pandemic has passed), have portfolios that perform more poorly than those who stayed invested. It’s incredibly difficult to pick the bottom of the market and when to buy back in, so it’s likely you will miss out on a significant part of the rebound.
Selling your losses crystallises your losses, as it doesn’t allow your money to work for you in the long term through the effects of compound interest.
It’s often said that time in the market is more important than the timing of the market, so if you have the discipline and time to let your assets recover, the current dip in the market may not affect your overall plan.
Many experienced investors don’t make the decision to sell without factoring in what made them favour the stock in the first place. In other words, your decision to buy, hold, or sell should not be based on just current market movements. While it’s natural to be tempted to sell out of investments when the market is under stress, or the share price has fallen, the danger is that you’re selling at a bad time.
The recent selling across the market has been indiscriminate and global, with most sectors losing value despite their underlying investment metrics and previous performance. Investors driven by value will look for areas that will recover to provide a long-term return. Be clear on your situation and consider including these general factors into your investment strategy:
- Invest for the long term – Money you have in the market is considered to be money you don’t need right now. Determine your strategy based on the amount of time you can allow for your investments to grow and recover.
- Make contributions gradually – By investing a fixed sum into the market gradually and regularly, you will engage in a dollar-cost averaging strategy. This means buying more units when the cost is low and less when the cost is high.
- Diversify as much as possible – Consider a wide range of investment options to spread the risk across your portfolio. In other words, don’t have all your eggs in one basket. Incorporate global equities alongside local shares, and don’t forget to allocate to fixed income.
- Periodically rebalance your asset class weights back to target. This means that if your portfolio was intended to be 50% bonds and 40% growth stocks, once a year, for example, check to see if this balance still applies and sell down exposures that have increased in weight (value compared to total portfolio value) relative to your original target, and buy those that are underweight. This is an example of selling that can be beneficial. In this context, whether you are making a loss or a profit should be irrelevant to your decision to buy or sell.
- Seek good advice – Everyone has a different situation and their investment strategy should be personally suited to their lifestyle and goals. Talk to an adviser before changing your investment strategy.
Even if you’ve no spare money to invest in the share market, if you’re an adult wage earner in New Zealand, the chances are you have funds tied up in a KiwiSaver account. If so, and you’ve been tracking the balance of your account, it’s likely you’ve seen declines. However, don’t be alarmed, the same investment rules outlined above are also applicable for KiwiSaver investments. Unless you’re looking to withdraw funds for a first home, or are retiring in the very near future, you should regard your KiwiSaver as a long-term prospect that will endure and continue to increase in value, despite turbulent periods.
This doesn’t mean, however, that you should set and forget. Your choice of fund and the fees you pay can have a huge difference on your retirement finances. This is where Canstar can help. To access our handy tool to compare KiwiSaver schemes and decide on the right one for you, just click the button below.
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