Right now, economies around the world are taking a pounding. Stock markets are dropping and gold is picking up. In short, we’re living in interesting times and realistically it’s probably going to take a while before everything settles down. So is this a time to batten down the hatches or a time to get out and search for bargains? That depends.
The case for battening down the hatches
For many people, possibly most people, battening down the hatches is going to be exactly the right approach for now. If you have little to no savings (you probably shouldn’t be investing anyway), you should probably prioritise building a cash cushion. If you have debt, especially high-interest debt and you also still have disposable income, then your next priority should probably be to take advantage of the low-interest rates to pay down as much of it as possible.
If you’re just ticking along, but not really comfortable with putting your capital at risk just now, then stay out of the stock market. While the long-term trend may be upwards, there can be brutal downturns and while these might be short-lived from a historical perspective, they can feel like a very long time for cash-strapped investors. There can also be stomach-churning swings, which might be too much for many investors to handle, especially if they’re on limited budgets.
In short, if any of this sounds like it might apply to you, then, for now, it’s probably best to batten down the hatches and steer clear of the stock market.
The case for investing now
When you invest, you’re not buying a point on a stock-price graph, you’re buying part of a business. This means that your investment decisions should be driven by your view of the business’ long-term prospects rather than by the short-term actions of the stock market. You should also be aware that well-managed companies will do everything they can to ensure that their investors are protected during market downturns and may even take advantage of them.
For example, even when the stock market is trending downwards due to macroeconomic factors, companies which are still making a profit can release some of that profit in the form of dividends. This gives their investors an income to help them through the lean times. Companies may also use short-term stock-market downturns to buy back some of their shares, thus increasing both the short-term and long-term value of the remaining stock.
Even if companies are not in a position to do either, they may still be excellent long-term investments. For example, younger and/or smaller companies may be looking to do exactly the same as investors who are sticking with the stock market in its current state, namely, use the current uncertainty as an opportunity to steal a march on the competition while they are too fearful to move.
To make this strategy work, both companies and investors need to proceed with an eye to what the future will hold. It’s fine to be guided by the past. In fact, you could make a strong case for arguing that the past is the only guide we have, but you need to be very aware of the fact that there are likely to be significant changes ahead, and think about what that could mean for you and your portfolio.
For example, it has been speculated that COVID19 will make companies wary of relying entirely, or even mostly, on China as a manufacturing and distribution hub and that they will, therefore, try to establish manufacturing and distribution centres elsewhere, even if that means taking a short-term hit (or extending the hit they are currently taking). If this turns out to be true, it could spell major change in several sectors and create a lot of opportunities for investors who are ahead of the curve.