Looking at stock markets right now, it’s difficult for an average person to make sense of them. Bad news seems to make stock market values fall, but worse news makes it go back up. Stocks rise and fall on sketchy “good news”, but don’t seem to worry much about reports of a persistently high unemployment rate.
Have we entered a strange new world of investing with markets permanently distorted under the lens of COVID-19?
If anything, recent experience has shown us that the stock market is operating as it always has — on a mix of solid data, hope, fear, rumours, half-truths and the imperfect powers of predicting the future, in this case, amplified by the unfamiliar terrain of a global pandemic. Historically, the markets have faced worse setbacks and bigger fluctuations and will probably face them again.
Looking to invest in 2020? Here are five things to think about before you hit the “buy” button.
Buying a stock is a friendly bet
Buying stock is a gamble, though not at the level of turning cards, throwing dice, buying lottery tickets or guessing who will next be voted off the island. Investing in stocks is an educated bet that involves some understanding of the companies your stocks represent, the markets they serve, the general churn of economic forces, the study of price trends and patterns, and the ability to read complicated spreadsheets (learn how right here). But even if you carefully distill this information into a buy order, you’re still betting against the market, with the assumption that the market is currently undervaluing the stock you’re buying and its potential to increase in value over time. The coronavirus pandemic doesn’t change those rules — it just adds complexity to your calculation.
Emotion is a powerful driver of markets
Companies across the globe are working to develop COVID-19 vaccines and treatments. In recent weeks, we’ve seen the stocks of individual companies involved in those endeavours rise and fall on press releases and preliminary study reports. Even more important, the markets, in general, are rising and falling on good news and bad about drug trials that seem to predict a more rapid re-opening of the economy. While the COVID-19 pandemic and eventual recovery from it are powerful emotional drivers today, sentiment has always driven markets. Hope can be inspired by anything from sketchy promises made by politicians to the belief that tech stocks are invincible, to news that a major international trade deal will be signed this week… next week… maybe next year?
Emotion is a powerful driver for individual investors
Just as markets can be driven by emotion, individual investors need to divest themselves of the emotions that can lead to bad trading decisions. We may be particularly vulnerable during the COVID-19 quarantine as many of us face economic uncertainty, and concerns about future income. While you may think you’re approaching your stock market portfolio with the dispassionate eye of a Bruce Banner, many of us occasionally lapse into trading with the subtlety and emotional distance of the Incredible Hulk. We sell on fear, buy on euphoria and even become emotionally attached to stocks that should have been kicked to the curb a long time ago (sorry, old buddy). Try to set realistic, concrete rules and goals (find help here) for your stock portfolio and stick to them, even when your feelings change.
Diversify your investment portfolio
Even a broken clock is right twice a day. The worst investment strategies are right sometimes and the best ones are wrong sometimes. Choose your portfolio with the best of intentions and the best information available, but spread the love around to make sure that no single event, company earnings report, segment shakedown — or even a worldwide health event — can sink you. You’ll sleep better and your portfolio will stand tall, even as less-diversified portfolios around you crumble.
Know your capacity for risk
Strange times can upend our thinking, even convince us that we need to reach out and buy ever more risky stocks to ensure we receive the returns we’re hoping for. Before you buy something you regret, think about the person you really are. Are you Hell’s Kitchen or The Barefoot Contessa? Kim’s Convenience or The Walking Dead? Have you always had an appetite for risk, or do you normally prefer safer investments? Think about who you were before the pandemic. You’re still that person. Invest accordingly.
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