How To Invest In A Pandemic
History tells us that if you can feel the fear and ignore it, markets generally come through pandemics unaffected, says finance and markets lecturer Swati Puri.
18 October 2021
The world has seen five major epidemics since 1900, but it’s reassuring to know that none of them has lasted long enough to create a massive impact or ended the financial markets.
And each time an epidemic has ended, stock markets have rallied to new highs and bounced back.
What’s more, there’s never been a 20-year period where investors with diversified portfolios have lost money in stock markets.
The Spanish flu and now Covid-19 both caused tremendous turbulence and speculation, however, neither of the pandemics stopped investors making investments in financial markets.
On the contrary, investing activity increased during the Spanish flu and we’ve been seeing the same trend during Covid-19.
Markets in the Spanish flu
The Spanish flu in 1919 was one of the last deadliest pandemics to test humankind.
It infected 500 million people and killed 30 million to 50 million people.
The flu came in three waves and lasted from July 1918 to May 1919, leading to quarantines, labour shortages, and an increase in the unemployment rate.
Strangely, the stock market boomed during the Spanish flu and the impact of the pandemic on the Dow Jones was minimal, with the market unaffected by all three waves of Spanish flu.
World War I, which was at its high at that time, had a larger impact on the stock market than the flu.
Although the Dow Jones dropped by 10 per cent during the second wave, the market bounced back as the flu cleared up.
The S&P 500 index went up by 8.9 per cent in 1919, and the UK equity market rose by 27 per cent in the same year.
What about Covid-19?
Since the World Health Organisation declared the novel coronavirus a global emergency, there have been more major swings,
both highs and lows, in the last three months than in the past 12 years.
In March there were some major upheavals in the S&P 500 index amid the coronavirus crisis, with the stock market plunging 12.5 per cent, the 19th worst in history in the month of March. But, the market has been mainly moving upwards since.
The first quarter of 2020 showed some major dips in 11 sectors, including airlines, leisure products, energy, and industrials.
But 41 per cent of the industries listed on the S&P showed gains, led by oil and gas refineries, gold, healthcare, and information technology.
There were initial fears that the coronavirus could also be felt in the New Zealand stock market in February, when the stock market fell more than 3 per cent overnight, and the Kiwi dollar dropped to its lowest point since August 2015.
But, it seems the market is on the recovery phase – and there’s been a jump in the prices of stocks.
Investors’ confidence has increased in New Zealand, because of the government’s response to Covid-19, investors have more faith in the economy, and having regulatory bodies like the Financial Markets Authority (FMA) monitoring the sector.
The stimulus packages offered to industries suffering due to coronavirus have further given a boost to the New Zealand stock exchange.
What to do during Covid-19
If you believe that history will repeat in this pandemic, there are some things you can do.
1. Overcome your fear of investment. One of the best strategies right now would be to have a disciplined investment approach and invest as you normally would, with a long-term perspective.
When prices drop, see it as an opportunity to increase your investment in the financial markets and take advantage of lower stock prices.
Dollar-cost averaging means if you buy when shares are cheap and also when they’re expensive, you’ll get an overall average purchase price.
Do not panic-sell when your shares go down, or you’ll lock in your losses. Be reassured that over the years, markets always go back to the mean return.
There is some fear and speculation around, so your best strategy would be not to buy or sell based on daily news or market movements.
Many of us are investing still. During lockdown, we took advantage of lower stock prices.
Now in New Zealand, eight out of 10 adults have some form of investment, which equates to 3.2 million people.
For example, Hatch, a platform for investing in the US stock market, has almost doubled investors during the lockdown.
2. Diversify. Diversifying is spreading your investments over a number of investment classes.
Have a portfolio with mixed assets, like stocks, bonds, deposits, index funds, and managed funds from different industries such as health, pharma, property, and gold. This helps minimise risk and offers a safeguard against ever-changing market dynamics.
The pandemic is affecting industries differently, so it would be a wise strategy to think about the impact Covid-19 has on various businesses before buying stocks of a particular company.
For investors with limited financial knowledge, instead of buying stocks, a good option is an index fund or managed funds.
Having managed funds and Exchange Traded Funds (ETFs) of various assets minimises your risk and offers a good return on investment.
With Covid-19, investor confidence was a bit shaken due to market uncertainty and not knowing what the future holds, but it seems it has been quickly restored and investing has increased in the financial markets.
In 2020, New Zealanders have higher confidence in managed funds than the stocks they bought themselves, similar to 2019.
In 2020, eight out of 10 people have investments in either KiwiSaver, which is by far the most preferred form of investment, followed by term deposits or another form of investment.
3. Asset allocation. Asset allocation creates a balance between risk and reward to an investor.
Choose an investment product for your risk profile, how long before you need your money, your age and financial goals.
Shares are suitable for helping you reach long-term financial goals because they generate high returns – but they’re considered risky.
Debt instruments with reasonable returns add stability to the portfolio, buffering you against price changes in the stock market.
Some of the common debt instruments are debt security, government bonds, company bonds, and fixed deposits.
These are less prone to market fluctuations than equity investments such as shares, managed funds, and Exchange Traded Funds (ETFs), where the returns are more influenced by changes in the stock markets.
With easy trading and investing platforms available in New Zealand, such as Sharesies, Smart Shares, Hatch, and ASB Securities, Kiwis can choose various debt and equity instruments, depending on their risk appetite and financial goals.
KiwiSaver is still our most popular form of investment and three out of 10 New Zealanders have KiwiSaver as their only form of investment.
Term deposits are our second most preferred investment. We’ve seen a big increase in peer-to-peer lending, doubling to 4 per cent in 2020 from 2019.
Investing in government and corporate bonds has increased, from 3 per cent in 2019 to 6 per cent in 2020.
Good returns and ease of investment were some of the main reasons investors chose a particular form of investing platform.
4. Emergency fund. At this time, more than ever, before taking on risk in a volatile market, it’s always wise to start with an ‘emergency fund’ and then invest what’s left over in financial markets.
An investor should have a reserve fund with least three to six months’ worth of expenses in liquid savings account to ensure it is available at a short notice.
An investor might not lose money in the current scenario, but it’s prudent to have an emergency fund and feel secure before taking any risks.
Warren Buffett, self-made billionaire and CEO of Berkshire Hathaway says, “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
5. Review your portfolio. In this era of globalisation, an event happening in any part of the world has an impact on your local financial market.
It’s always advisable to monitor your portfolio from time to time and make necessary changes.
Check in with your financial planners or advisers. They can help you to review your portfolio and work out which assets are best suited to your own risk profile.
6. Rules of investing. There are no golden rules when it comes to investing. But this is a good time to restate some of the basic rules:
Rule of Debt-Equity in a portfolio. Investors should hold stock equal to 100 minus their age. Say, for example, a 55-year-old person would have 45 per cent of their investments in the equity market and 55 per cent in debt instruments like bonds and government instruments.
Rule of 10, 5, 3. An investor should expect around 10 per cent return from stocks, 5 per cent from bonds and 3 per cent from liquid cash and cash-like accounts.
Rule of 72. This rule estimates how long it will take to double your money. For example, under the rule of 72, if the interest rate is 8 per cent, then your money will double in nine years (72 divided by 9 equals 8).
Rule of 114. This works out how long it takes to triple your money. Divide 114 by the interest rate to know how many years it would take for the money to triple.
The big picture
We’re stuck in uncertain times where it’s difficult to predict what the markets hold for investors.
However, financial markets have always delivered good returns from a long-term perspective.
Keeping the big financial picture in mind, it would be wise to have a disciplined investment approach and continue investing across various asset classes, to reduce the impact of market turbulence.
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