Investment decisions during the pandemic-should you save or invest?
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. The question remains as the pandemic goes on - should you invest during a pandemic.
This article will explain:
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, here are three reasons why you should consider investing:
- 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 in itself will protect your money from inflation regardless of its performance.
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.
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.
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.