The COVID-19 pandemic has caused economies worldwide to fall into a slump in the past two months—and the stock market isn’t spared. The Philippine Daily Inquirer reports that as of April 21, 2020, the Philippine Stock Exchange index (PSEi) dipped by 56.32 points, or 0.97 percent, closing at 5,733.65 on April 20. (In comparison, it ended 2019 at 7,815.26).
The trend comes an unprecedented shock for investors, who are torn between selling and buying their shares. But is investing during this time of crisis actually a good plan? If so, what are the best investments to make?
How do you actually invest your money a time crisis? Let’s find out.
Effects of a crisis on investors
Fluctuations are inherent to markets, but a crisis can trigger a continuous decline—especially to markets of high volatility—that will shock all investors. A diversified portfolio and constant vigilance on the economic situations are essential to thrive in the world of investing.
At present, the new coronavirus has brought the economy down and is deemed to precede the global recession during the 2007-2008 Financial Crisis. The market has crashed and the stocks are priced low—it’s either you sell your assets in fear or you immediately buy them.
During times like this—a period of uncertainty—people may experience emotional investing at height. This manic feeling of either euphoria and depression can lead to making poor investment decisions.
There is so much research to be done and traits needed when investing during a crisis, including a strong risk appetite, skills to speculate the trend through supporting data, and creatvive approaches toward investing. It’s best to stay updated and learn.
Where to invest during a recession or a period of uncertainty
During a crisis, here are some of the best stock investments to make in the Philippine setting:
1. Low-risk investments
Until the coronavirus is fully contained or a COVID-19 vaccine is discovered, there’s an indefinite time when the market will recover from its major plummet. It’s not the time to make uncalculated decisions or be experimental with your investments as the probability of risks is high. You can choose bonds or fixed income and treasury securities.
Playing safe means avoiding to invest in companies that are highly unpredictable and mostly using borrowed capital. Instead, chase the opposite, meaning companies with consistently good cash flow and low debt. It’s convenient to play safe on your strategies while the economy is struggling.
2. Equity market of staple goods
In relation with the first item in this list, safe options for investments are those considered as staples for consumers. These are the essential goods belonging to the first tier in the hierarchy of basic human needs—meaning these are bought and needed on a regular basis (even day to day) regardless of one’s financial status.
These basic needs refer to food and beverages—non-discretionary items with and without community quarantine or lockdown. Consumer staples can also refer to some household products that are used every day or regularly. Tobacco and alcohol products are also included.
The constant need for these goods makes it a secure investment option in the equity market.
3. Equities on industries of non-discretionary goods
Regardless of one’s financial status, a crisis such as this strips us away from luxury and fancy lifestyles. People are bound to forget those goods and services that are merely relevant due to the season of the year, of unsustainable hype, and other variables. These are things you spend your money on cyclically or less regularly.
Again, this is still in line with the two previous items, proving that people need to focus on investing in industries, goods, and services with demands all year round. The consumer staples tell you what industries are resistant to recession: grocery stores, alcohol manufacturers, discount stores, cosmetics, and funeral services.
4. Real estate
It is not a surprising scenario that real estate is quite defiant to major crises or recessions compared to other industries, if the investments are carefully made. Economic declines also drag the values of home and properties, but it’s not entirely bad. These properties are sold at a low price, which you can take advantage of.
While waiting for things to go back normal, you can rent out these properties to tenants. This can generate a passive income throughout the period of lows. Then, you sell it at a higher price for larger profits when the economy and market have gained ground. Make wise real estate investments for latent profits.
5. Dividend stocks
Another form of passive income is dividend stocks. Your placement has to grow over time, and it allows you to receive a portion from the earnings of the company.
One factor you should look at first is the debt-to-equity ratio—a low ratio is strongly recommended. To ensure this, choose those companies that show good indicators such as having an increase of dividend payouts for a minimum of 25 consecutive years.
6. Gold and other precious minerals
Gold has quite proven its firmness in the commodities market. It can retain its value against recession or uncertainty period. Silver and other precious metals are a relatively safe option for investments during a crisis.
Tips on investing during a crisis
Warren Buffet is one of the most successful investors, and here’s his advice on investing in crisis:
· The market will recover no matter what.
Ned Davis Research group conducted a study on the 28 global crises that took place in the past one hundred years, starting from World War II to 9/11 terrorism, and it revealed that the markets went to steep dips and fully recovered after. This is what Buffet says: Businesses and markets will thrive, even if the world is seemingly about to end.
· Equities are more valuable for long-term investments.
Some investors see this as an opportunity to buy units, while others are worried about the crisis that they sell off their assets. Cash equivalent may be a good asset during a crisis, but this was negated by Buffet by writing in 2008 as a terrible asset that virtually pays nothing and most likely depreciates in value. This is backed up by the Sage of Ohama who explained that long-term investment benefits more from equities than cash.
· Choose stocks wisely.
Buffet said that should the market finally close, you should have invested in stocks that you would be happy to keep or own.
As the last takeaway, diversify. Truly a classic: Never put all your eggs in one basket. It doesn’t only allow your investments to thrive at different rates and in different places that make your portfolio stronger, but also prevents a massive loss. It is crucial in this period of crisis, where the value of products and industries may become invaluable.