Every economist and investment strategist around us says we’re on the brink of an economic depression. Well, this might be true.
It is a tumultuous time, but that doesn’t mean you have to approach your finances blindly. Here are some answers to your questions about investing and individual financial management during the COVID-19 pandemic.
The stock market tells us that we are in a recession, probably a depression. That by the given fact that stocks have declined so much and moved fast from what is called a bull market (a robust, strong stock market) to what’s called a bear market.
Currently, the top two questions probably on your head are: Should I be buying, and Should I be selling? Typically, the answer to both is no. If you followed your instinct today and got out, you’re likely going to miss the upturn. The upturn after one of these declines tends to happen before it’s clear that we’re coming out of recession.
The idea that keeps tempting you with soliloquies like: “If I can see what’s coming, can I take action?” and this is ultimately wrong. What you should do is something called rebalancing your portfolio ( buying or selling assets to maintain the desired level of asset allocation or risk). For instance, if you started off with an investment portfolio that’s made up of equity of up to 80 p.c and 20 p.c bonds, which is a risky portfolio. With that portfolio, over time you should earn higher Returns on Investments (ROI). Because of what’s going on in the stock market- depression, maybe you’re now no longer at 80-20 but you’re at 55-45. Maybe you want to go back to 80-20, which means you want to buy equity and sell bonds. This re-balancing back to your goal can actually force you to make counter-intuitive decisions that you wouldn’t otherwise make.
How about if you just got into investing and the pandemic came by? :- assuming that you’re in good financial shape (you have an emergency fund and little debt). Don’t look at your existing balance, because it’s just going to discourage you. By investing a percentage of every paycheck, buying stocks low and selling them high, you’ll do much better than if you tried to guess the market.
When you’re a case of unemployment due to COVID-19 and your government has nothing like a stimulus check then you’ll see yourself being the neediest of humans, but no. Unemployment is going to be expanded particularly for those people with no unemployment insurance like Waiters and Freelancers while for others it is going to mean, unfortunately running up credit card debts and an overdraft. If these things are happening to you, stop investing. Instead, go into a ‘Power Saving mode’: You will need to replenish your emergency fund and pay down credit card debt before you begin to invest again.
Another sensible idea must have struck you some five years ago and you made a home investment purchase that should have lasted for five years. And the pandemic rode with a dilemma, you now need help. That goal is near-term and you’ll need to spend that money soon, so if I were you I wouldn’t invest much in the stock market. The reason I wouldn’t is because of times like this
More funds should be in bonds or debt. Whereas stocks are the ownership of a sliver of a bigger company, debt or bonds actually owe you money. Debt tends to be less attractive than stocks because the stock market can go up, but for the debt, you only get back the amount you lent, with interest. Assuming your investments are done like this, you should be okay. It might take 6 months longer to buy your home, but you’ll still be able to do it. Conversely, for a longer-term investment, like retirement, you should have more equity—which is more risk, but typically over time, it’s a greater return.
HOT TIP:
Do not be tempted to start trading in Bitcoin. The other question we get, which is a little doomsday, is ‘Should I buy Gold?’ Most people get convinced that this move is an investment. Think about it the gold of ancient Egypt—it’s still worth gold. The stocks and bonds of ancient Egypt aren’t worth anything. You should only buy gold because it is beautiful.
