Hatch GM Kristen Lunman shares some dos and don’ts for investing during a big market decline.
Covid-19 has sent share prices from New Zealand to New York tumbling, sparking a wild ride over the last couple of months and into a volatile bear market. If you’re not familiar with the term bear market, it refers to instances when there’s a stock market decline of 20% or more from recent highs lasting at least a couple of months (a bull market, on the other hand, refers to a market that’s on the rise).
A bear market, recession or market crash can be a challenging environment for investors, but it can also present great opportunities. Even the most cool-headed may wince at market dips but eventually be on the hunt for quality deals.
Whether you’re an old hand or a new investor keen to dip your toes in the current bear market, here are some dos and don’ts to consider, from bargain hunting to keeping calm.
Do carry on with your investment plan
You might start investing with a goal in mind. Maybe it’s buying your first house, going on a trip, or even retirement. The point is, they’re all investing goals based on events that will likely happen in five, 10, or 20 years in the future. If you’re investing a regular amount in sharemarkets through your KiwiSaver, funds or company shares, you shouldn’t plan to make changes to your investing plan when volatility hits. Reacting to the ups and downs of the market can keep you from achieving your long-term goals. Play the long game and stay the course.
Invest in what you know and understand
The investing principles of diversification and a long-term view still apply in a bear market, so it’s important to do your research. A good place to start when investing in shares is in a company that you know. Think about the brands you buy or a product that everybody loves. While there are no guarantees with share-picking, if you love a brand and your friends or colleagues do too, then there’s every chance the company behind it is successful or, at least, has the potential to be.
When you buy shares, you purchase a personal stake in that company, so you’re essentially backing the future of that company. Monitoring company and earnings announcements is a good idea. Also, keep an eye out for interviews with key people in the business.
Invest in quality companies when they’re on sale
If you’re a long-term investor who’s confident in the strength and potential growth of the companies you invest in, you tend to look at share price drops as a “sale”. By sale, we mean an opportunity to buy shares you believe in at a discounted price. Sometimes it’s called “buying the dip”, because investors are on the lookout for good-quality shares that are trading at a discount.
It’s important to differentiate between companies that have seen their share price fall as a result of everything being dragged down in market panic and those that have dropped because they’re on shaky ground heading into a recession. If you want to thrive on the other side of a dip, then it’s a good idea to invest in high-quality companies that have strong balance sheets, low debts and cash on hand. Corrections, bear markets and recessions will come and go, but great businesses are resilient.
Consider “recession-resistant” industries
Some investors simply can’t stomach watching their investment portfolios dive by 25%. If that sounds like you, you might be surprised that some industries perform quite well during recessions. As we enter an economic slowdown, think about what things you’re buying now: toothpaste, soap, shampoo, laundry detergent, dish soap and toilet paper. So there’s still an ongoing demand for certain household items, like toiletries and consumer staples, which are doing well. It’s also likely you’re still buying alcohol and, of course, food. But when it comes to clothes, you might consider shopping at low-price chains over your favourite boutique shops. All the industries just mentioned typically perform well regardless of what’s happening with the economy.
Look to the future
It’s hard to know how long a bear market will last and currently, we just don’t know how long the Covid-19 crisis will go on for or how much it’ll hurt the global economy. So, as a rule, don’t invest in a bear market with the hopes of getting rich quick. Instead, take a long-term approach to investing known as “buy and hold” and assume that any shares you buy now are with companies that you’ll continue to back for many years to come.
Don’t be a day trader
When investors buy and sell shares quickly and regularly, rather than letting investments sit tight and play the long game, they’re trading. Some investors rely on luck and invest their money when a share is on the rise, only to pull it out when the share price is plummeting. Trying to “time” the market in this way isn’t a good strategy. Investors who’ve been around the block know that you can’t beat the market this way.
There are a few reasons why actively trading isn’t a good way to get started in investing: it takes a lot of time and energy, it can up your investment costs, brokerage and other expenses, and it can increase your chances of buying and selling at the wrong time. When the market is volatile, there’s a reason to let your money ride the wave, and over time the peaks should outweigh the valleys.
While it might seem attractive to try to time the bottom of the market and increase your investment amounts, in a bear market, volatility can continue for some time. Because of Covid-19’s impact, we could experience months of ups and downs before an eventual market recovery. What you don’t want to happen is to commit money that you might need back in a hurry and then have to sell at a loss.
It’s tempting to feel panicked by the negative news we’re seeing and hearing around Covid-19. When it comes to investing, we can be our own worst enemy. Many investment losses come from a mixture of impatience and impulsiveness – two very human conditions. Emotional factors like fear, greed and overconfidence can wreak havoc on our portfolios. We don’t make our best decisions when we panic so try to take a step back, stay calm, and trust your research.
Is now the right time to invest? Most investors wish they had started earlier and feel that “time in the market is better than timing the market”. There’s no way to know exactly when the sharemarket bottoms out during crises like Covid-19, so consider starting slowly, investing regularly over time, and taking a long-term approach.
Kristen Lunman is the general manager of Hatch, a digital investment platform that gives New Zealanders access to the US sharemarkets. An earlier version of this article was first published here.