Investment and Coronavirus - Everything You Need to Know

Investment and Coronavirus — Everything You Need to Know

In recent weeks, the global stock market has plunged because of the COVID-19 pandemic. Most of the stock valuations are nearing lows that were last seen during the global financial crisis. This downturn in the investment market has many investors panicking. Still, for a smart investor, this downturn can be an attractive opportunity to grow their investment portfolio by getting-in on stocks at lower prices.

So if you were planning to start investing but are now hesitant because of the pandemic, then you should instead see this time as an excellent opportunity to begin your portfolio. Most great, well-established businesses are resilient even in the face of global pandemics; these businesses will also start reaping profits once the downturn gets over. So, while not ignoring the fearful economic mood, you can still play it smart by investing in the right companies at alluring prices. But before you do that, there are certain things that you should know about investing during the pandemic.

Investing for Income Vs. Growth

One of the most important things to know is how your investment strategy will determine the ideal companies for you to invest in. Here, in general, you have the option of investing either for income or growth. So, if you are investing for income, then you should look at investment platforms that are offering good returns. There are several Singaporean stocks as well as REITs that pay out decent dividends ranging anywhere from 5% to 6%, and some REITs are also offering as high as 10% returns. But you must keep in mind that high yields do not always mean the business is good.

On the other hand, most share prices are plunging due to weak fundamentals, causing the dividend yields to look deceptively higher than they actually are here. So if you are planning to invest for growth, then you should invest in already established major companies like Amazon or Facebook as their fundamentals are healthy, which will allow them to bounce back even stronger once the crisis ends. With these companies, the room for growth is vast, but the immediate dividends are not so high.

Investing in Home Vs. Foreign Stocks

Similarly, your choice of companies also does matter here. Given the current market conditions, if you choose to invest in Singaporean companies, then you can benefit from the localized knowledge as well as a better level of safety that comes with the companies being close to home. This is a great option if you don’t want to risk it, given the current situation. But with the local companies, the potential for growth is not as significant due to the small customer base they serve.

On the other hand, if you have a decent comfort level with investing in foreign stocks, then there is an excellent opportunity for growth since these multinational companies have a larger audience and customer base. Moreover, most of these companies are also well established with strong fundamentals to tackle the downturn. So, depending on your requirements and comfort level, you can choose either of these options. However, you need not be binary; instead, you can invest in both according to your comfort level.

Diversification of Your Portfolio

Diversification of a portfolio is now general knowledge amongst new and old investors. However, the importance of diversification only grows in the present downturn since the market is not as stable. Hence, here, you should invest in at least ten stocks instead of deploying all your money in one or two stocks.

Moreover, regardless if your goal is dividends or growth, you should diversify your portfolio by including both types of stocks, but with different allocation. You can divide your portfolio into two parts: 70% and 30%. Here, you can either purchase 70% stocks that are growth-oriented and 30% that are dividend-oriented, or vice versa. Whatever your goal is, you must avoid investing solely in one type of shares as it can cause some problems down the line for your portfolio by limiting your returns or growth.

Correct Stock Valuation

In the current situation, you must identify the right companies with strong fundamentals that can ride out the storm, and only then should you start deploying your money into their stocks. Here, low stock prices do not mean that the stock is undervalued. Hence, you need to take a close look at the stock valuation by comparing its P/E ratio (price-to-earnings ratio) with its historical average. The assessed valuation reflects how the stocks are priced with regard to the company’s earnings.

So, stocks that are trading below their historical average value with a good margin for safety should be under your radar, and not the stocks that are just cheaper in the current market. An example is Apple, whose shares are not cheap right now, but they are still significantly below the historical average. By doing this, you can get hold of stocks that are priced lower but will still offer high returns in the future once the crisis ends.

Deploying Money in Tranches

The Black Swan event has caused the market to plunge downwards in the last couple of months, but no one knows if the market has bottomed out yet. So, if you deploy all your money at one time, you might be catching a falling knife. Since it can’t be predicted when the market reaches to the lowest, you must safeguard yourself by deploying money in tranches over an extended period instead of deploying it at one go. This will work as a safety net in case the market plunges further, and it will also help you figure out the rate at which the market is going down, and how you can cope with it by making adjustments to your money deployment.

This is all you need to know if you are planning to start your investment portfolio in the current condition. As long as you study the market thoroughly, and pick only the high-quality stocks to invest in, you can comfortably ride out the downturn with significant returns in the coming years. This is a great time to invest; you just have to be smart about it!

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