The pandemic brought about some harsh realities about finances, one of which was how little people are prepared for money and how financially insecure most of them are. Granted, these challenges were unwarranted, but they forced people to take financial matters into their own hands and tread into ventures they never thought they would. Investing is one of those tasks that most people never thought to do until they realised that savings alone could not secure them a stable financial future. Long-term investing during a crisis is not an option for many. The question remains as the pandemic goes on - should I save or invest during a pandemic.
This article will explain:
- Why you should invest during a pandemic
- The best assets to possess during a crisis
- What you need to know before you invest
- What strategies you can use in your investment
Why you should invest during a pandemic
Now it is not to say that this advice is for everyone. Most people do not have the expendable income to spare to invest. For those who do but are averse to investing during a pandemic, here are three reasons why you should consider investing during pandemic:
- Market dips: A pandemic is most likely to cause a dip in the market initially, driving prices of stocks and other investments down. It is a perfect opportunity for investors to buy assets at a cheaper price, hoping to see massive profits in the future. It is known as contrarian investing, and many investors take this approach to their investments. Contrary to the loss due to crisis, most dips do not last for long, and it recovers pretty quickly. Studies have shown that investments will always recover in a matter of months, no matter how bad the crisis is. Interestingly, the dip duration of this pandemic has been the shortest, lasting only for four months
- No fear of missing out: Since the pandemic stopped most activities, many are forced to take time off from their regular tasks. Chances are, you have more time to study and research before you make a decision. There is no scope of rush in this situation because even if people want to buy everything, most people do not have the existing financial stability. With more time and space, you can equip yourself with more knowledge about the asset class, market fluctuations and clarify your goals. It will help you to make better investment decisions
- Alternative investments: Now, this applies to people who do not have much income to spare after necessary expenses. Since most traditional investments require a large initial investment (minimum 3000 EUR), alternative investments can be a way for people with smaller capital to start. The pandemic brought many issues of traditional financial investments to light and paved the way for many newer alternative investments. The already existing well-known alternative investment is hedge funds which have already seen a boom during the pandemic. However, that is not the one we are talking about. We are talking about novel alternative investments such as crowdfunding, peer to peer lending and its many variants. Quanloop is one such type of alternative investment that allows people to invest with amounts as low as 1 Euro. Almost all newer establishments have implemented fintech and opened the market to people who could never access traditional investments. Starting with alternative investments, even with a Euro, could help you learn more about investments early on and help you to make better decisions when you have more capital to make contributions. Investing during the pandemic or in itself will protect your money from inflation regardless of its performance
The best assets to possess during a crisis
It isn't easy to rely on equity returns alone when the market is crashing. So where to invest during pandemic? According to S&P Capital IQ, every market sector has fallen this year, with metals and mining falling the most, at 22%. Fortunately for investors, other asset groups tend to stay the same or rise in a slump.
- Bond: Even though fixed-income assets like bonds get a bad rep due to the low-interest-rate environment, bonds have routinely outperformed stocks in a bear market. In 2008, MFS Investments reported that global bonds returned 12%. During the financial crisis of the early 2000s, bonds performed admirably, returning over 8% each year. Bonds have always performed well during economic uncertainty because they are viewed as a haven. Long-term bonds, in particular, are seen as good bets
- Precious metals: Precious metals are a good way to secure investment during a crisis. Precious metal prices move in the opposite direction to stocks, making them one of the best reasons to keep it in your portfolio. This is called a "negative correlation." Recently, the correlation between the two has been at an all-time low. In 2002, gold rose by 24.7%, and by 2008, it had only increased by 2.7%. For the eighth year in a row, gold has outperformed the S&P 500, making it the year's greatest performer thus far
- More stocks: Although it's been mentioned that one cannot rely on equities during a crisis, we should not forget them altogether. Even during a crisis, you can invest in specific stocks to secure your portfolio. Some examples are defensive stocks that profit throughout the market cycle because people need to buy goods/services regardless of a crisis. A good example of defensive stocks is the consumer staples sector, which includes companies that produce hygiene products. Another example is the healthcare sector or utilities because they have little exposure to market crashes
- Real estate: Real-estate can be a difficult investment if you do not have enough cash lying around. But if you do, real estate investment would be the optimal investment choice due to its lack of volatility. However, it does not mean that it is not risky in the long term, which you should also note
- Cash: During a crisis, cash is regarded as an asset class that hardly moves. Despite inflation, cash is one of the few asset class that has no correlation with other assets. Due to a negative correlation with most other assets, cash will always surpass shares in a down market
What you need to know before you invest
It would be best if you assumed some harsh realities of investing. Some of these are beyond your control, but they are not unpreventable. What you need is to maintain consistency and create a safety cushion in case your investment fails. It will also give you an overview of how much risk you can take with your investment. When looking to invest, you have to accept that:
- All investments carry risks
- You cannot time the market
- The market will be volatile
Second, it is best to prepare a budget, even for investments. This means setting aside a particular amount for liquid savings, which should be accessible at all times and a separate amount to invest. You need to accept that you cannot use this money for anything other than investment and that you do not need this money for a long time. The ideal amount for liquid savings is 3 months to get you through any emergency before making any investments.
Lastly, if you have any debt, whether good or bad, make a spreadsheet of how much you can pay off and how quickly you can pay it off. Check if you can pay your debt simultaneously with saving and investing. Regardless of the outcome, the overview of the sheet will give you an idea of your financial abilities and prepare you for future decisions.
What are the most promising sectors during pandemic?
The tech industry is one of the most promising sectors after the pandemic, as it benefited the most from it. As everything transitioned to "from-home", companies like Amazon, Netflix, Microsoft, Zoom, and many others greatly profited largely from the pandemic, their tech index going up by 47.5% in 2020.
The healthcare sector was largely unimpacted by the pandemic and it did not suffer from much volatility due to its necessity. The healthcare sector saw an increase of 17.4% during 2020 in the broader healthcare market (e.g. insurance, pharmaceuticals, etc). Not to mention that the production and distribution of the vaccine contributed to the further increase in the healthcare sector index. Although this increase will likely be stunted in the future as the need for vaccines will decrease, the healthcare sector has been and will remain stable.
Real-estate sector during the pandemic has seen a surprising increase. Because of the nature of the underlying shock, the reaction of the euro area housing market to the COVID-19 crisis was different from that of earlier crises (the reason being sub-prime mortgages). The housing sector has remained strong during the pandemic throughout. Despite the restrictions, the housing market increased 6%, and housing loan growth remained robust, reaching 4.2% in early 2021.
How not to invest during a pandemic
Trying to answer this question isn't a simple task. Even while some industries fared better than others during the epidemic, no one can foresee how much money will be invested in these various fields in the future. When it comes to investing during a pandemic, there are several general rules to follow:
- Fear of missing out is very real issue when it comes to investing. To avoid losing out, you may be tempted to give up low-risk investments in favour of more risky investments like stocks or cryptocurrencies. GME stocks and cryptocurrency can appear to be a good investment because others have done well with them, but you should consider that there is a significant risk involved.
- Investors tend to overlook the highly volatile market and fail to take the necessary measures. One must recognise that instability is a given when it comes to business. Because of the volatility of investments in riskier assets, you must be prepared to lose money. This implies that you must have a financial cushion if this investment fails.
- Timing the market does not work. It's not a new fact that timing the markets doesn't work, but some investors appear to forget this as the market fluctuates. The idea of buying cheap and selling high is simple for investors to grasp, but all too frequently, they get caught up in trying to buy at the absolute lowest low and sell at the absolute highest high instead. Selling or buying at the optimal moment is rare, given how volatile the market may be from one day to the next.
What strategies you can use in your investment
Growing your finances during a pandemic needs a lot of research and credible strategies. Fortunately, there are many. When choosing a strategy, check its suitability to your needs and capabilities, such as whether you can invest long-term and how often you can contribute. Depending on your financial situation, you should, at least, be able to target the following:
- Buy and hold: Market dips during a crisis is common, especially in the beginning. This is due to the fluctuating nature of the investment market. Such losses are usual, but it will tempt you to sell as many investors do. However, if you look at the bigger picture, you will notice that such dips are for the short-term (for one year at least). In the long-term (e.g. 10 years), your investments will rise exponentially and stably. Hence, your aim should be to invest the amount you will not need for a long time, and when losses occur, it will not impact you significantly. You should be able to hold until the crisis averts and your investment picks the pace again.
- Diversify your investment: It cannot be stressed enough - diversify your investment to dilute your investment risks. With diversification, you reduce the risk of suffering significant losses. As a result, if one of your investments suffer, the other cushions you temporarily until the first one recovers. It also includes investing in alternative investment platforms which have a low correlation with traditional assets such as bonds and equities. It makes them an appealing tool for portfolio diversification and to receive higher returns.
- Compound your investment: Compounding will grow your money faster and more significantly than adding more. As you compound, it reduces the need for you to add more since your investment is returning on your capital and your interest. At some point, you will see that your returns will match your contributions or more.
Summary
During a pandemic, it's up to you to decide whether you should save or invest your money. However, there is a good reason to invest during a pandemic if you have the means to do so. You have more investing possibilities than ever before, such as alternative investments, in today's world. Research the best assets and industries for investment. To protect your money throughout the pandemic, you can think about techniques like buying and holding. You can also decide where to invest post pandemic.
Investing during a pandemic need not be so stressful. Rather, it is the perfect time to invest as the market is cheaper during a crisis, and the market always recovers. The best time to invest is always now, and right now is the time to invest. All you need is a little consistency and patience to keep temptations and panic at bay.