3 tips to invest successfully during a crisis
Investing during a crisis is a high-risk, high-reward strategy. It is high-risk because the economic climate usually looks really grim at that moment and whether you are an employee or a business owner, your employability or your business could be negatively impacted in the months and quarters ahead, this is also a situation that requires you to be more prudent and set aside more cash reserves during such times. Additionally, if the market turned for the worse, investors (who are generally more loss-averse than risk-averse according to behavioural finance) will feel more emotional pain when their investment portfolio experience losses, which is much more than the pleasure gained from an equal-sized profit.1
As much as we are cognizant of the risks, we also know that every crisis is an opportunity and that every crisis will eventually become a thing of the past. In April this year, when the world is at the worst of the Covid-19 crisis, we looked at the history of US bull and bear markets since 1926 as well as the math of percentage gains and losses in our article “End of the Bull, but fortune favours the brave”. Further validating that investing during turbulent times could prove to be a high-reward strategy.
Given that most investors are driven by greed and fear - we are wired to be greedy when market sentiments are bullish and fearful when market sentiments are bearish. Hence, it really takes a conscious effort to be a contrarian investor. Even if you subscribe to Warren Buffett’s philosophy of “Be fearful when others are greedy, and greedy while others are fearful”, greed (which in this sense could arguably border cheapskate) may cause you to want to wait for prices to fall even further in order to scoop equities up at a steeper discount, which may or may not happen, causing you to potentially miss the best days to invest.
Here we highlight 3 reasons why you shouldn’t aim to time the bottom or wait for a rosy recovery but start investing during a crisis.
- Seek low risk investment
A recession is not the time to experiment or take risks with your investments, and that means avoiding companies that are highly leveraged or speculative in nature.2 During a crisis, stock prices of fundamentally sound and stable blue-chip companies will also be dragged down along with the overall stock market, presenting the opportunity to buy great businesses at discounted prices. However, not all blue-chip will eventually emerge from the crisis and some may eventually go out of business. Hence, it is important to separate the wheat from the chaff by choosing companies that have resilient business models, strong balance sheets and good cashflow.
Of course, this is easier said than done as stock-picking will require you to pour through countless annual reports, learn about the companies you are about to invest in, and by the time you are done, perhaps the discount window has already closed.
It is reasons like this that fund managers and unit trusts exist; to help investors minimize risk and maximize return by picking the best securities to invest in at any given point in time, crisis or not.
With all the work that needs to be done, it comes with an Annual Management Fee that has been factored into the daily pricing of the fund. It typically ranges between 1.2%-1.5% depending on the unit trust. Many think that it is expensive but have you thought of the amount of work that needs to be done to select the companies, ensure their business model is sustainable and performance is consistent, manage the risk of the fund and continuously optimise the portfolio to deliver good performance for their investors?
You might also like: “Are fund managers worth all that fees?”
- Diversify, diversify, diversify
As the old saying goes, “don’t put all your eggs in one basket”. A good general piece of investing advice is not to pile into a single sector even if they seem like a rational choice. Amidst the Covid-19 health crisis, investors have been pouring funds into the healthcare and technology sector as it seemed like there are no other alternatives. While they are the obvious beneficiaries in the near term, don’t forget to also diversify across industries, geographical regions or even asset classes (such as in fixed income and commodities) as winners may run ahead of its fundamentals while losers play catch up.2
Read on to find out how to “Diversify your investments and build passive income with a multi-asset strategy”
- Invest prudently & for the long term
Before you get all excited and can’t wait to start investing during this crisis, be sure to do the following:
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Set aside at least 6-9 months of emergency cash. This is in case you or your spouse are faced with a sudden unemployment or an unfortunate health event that stops you from working. You can put these emergency funding into a safer haven like money market funds where they tend not to fluctuate and provide better and consistent returns as compared to keeping them in a bank. You also have the flexibility to liquidate them whenever you want. This helps you to grow your emergency funds and you will not end up in a scenario where you are forced to sell your equity investments at a loss for personal liquidity reasons.
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Learn how to deploy your emergency cash better in “Master the art of managing your cash with Money Market Funds”
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Avoid buy-sell-buy-sell transactions. Having many buy-sell transactions goes to show that you are a nervous investor that is trying to time-the-market and you may let your emotions get in the way. If you trade equities on a brokerage platform, transaction fees will eat into your gains and accentuate your losses. Although buying and selling unit trust on dollarDEX will not incur you any transaction fees, it is still worthy to keep a calm and level mind and focus on your investment goal.
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Instead, buy in small tranches periodically to not only average out your cost, but also to monitor how the crisis unfolds. This also allows you to adopt a more disciplined approach when it comes to investing and eliminates any emotions that may blindfold you. One good way to do this is through a Regular Savings Plan on dollarDEX.
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Lastly but most importantly, always have a long-term horizon when it comes to investing. Think back and ask yourself why did you start investing, was it for retirement or for your children’s university fees? Stay focused on your investment goals and let your investment portfolio ride along the waves of market volatility.
We hope that these useful tips and recommended articles will help guide and remind you along your investing journey with or without a major economic crisis and help you achieve your financial goals. Remember, a major economic crisis only happens probably once every decade, which means that in our wealth accumulation lifetime from graduation to retirement, we will probably only experience it 3 to 4 times, and everybody has a fair shot at it.
How you prepare for it and what actions you take depends entirely on you and this will become part of your investing experience. So make it count!
dollarDEX's Disclaimer
All information here is for GENERAL INFORMATION only and does not take into account the specific investment objectives, financial situation or needs of any specific person or groups of persons. Prospective investors are advised to read a fund prospectus carefully before applying for any shares/units in unit trusts. The value of the units and the income from them may fall as well as rise. Unit trusts are subject to investment risks, including the possible loss of the principal amount invested. Investors investing in funds denominated in non-local currencies should be aware of the risk of exchange rate fluctuations that may cause a loss of principal. Past performance is not indicative of future performance. dollarDEX is affiliated with Aviva but dollarDEX does not receive any preferential rates for Aviva products as a result of this relationship. Unit trusts are not bank deposits nor are they guaranteed or insured by dollarDEX. Some unit trusts may not be offered to citizens of certain countries such as United States. Information obtained from third party sources have not been verified and we do not represent or warrant its accuracy, correctness or completeness. We bear no responsibility or liability for any error, omission or inaccuracy or for any loss or damage suffered by you or a third party (including indirect, consequential or incidental damages) arising in any way from relying on this information.
This information does not constitute an offer or solicitation of an offer to buy or sell any shares/units.
This article has not been reviewed by the Monetary Authority of Singapore.
Information is correct as of 02/09/2020.
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