Consider this, markets all around the world are falling due to the raging pandemic. The newfound availability of learning resources online is making people pay more and more attention to the financial markets. This in turn, has pointed out a lot of buying opportunities in the stock market. But an experienced investor approaches a recession differently as compared to a newbie.
Some (mostly newbies) might argue, why wait? Every stock is down, just buy every stock you see! Buy the dips mate! Obviously. Pretty straightforward right?
Well, if investing was that straightforward, everyone would’ve been a millionaire. But the market seldom makes it easy to make a million (haha!)
With investing, like everything else, there is the right way and then there is the wrong way.
Most new traders / investors end up losing money and consequently, interest in the financial markets. But on the other side, there are people doing it the right way and making a living through the markets!
So, what is the right way and why are more people not being able to do it? Just 2 words differentiate a successful investor from an unsuccessful one –
The market rewards those that take the time to learn the intricacies and then make moves in a disciplined manner. It is redundant to say this, but i will anyways – if you want to make a million overnight, good luck, because only luck makes millionaires overnight.
So, back to the “right way” to invest.
Here are 3 basic factors to consider that could form the base of your investing strategy in the middle of a recession
Your risk appetite
Do you have an appetite for destruction? If not, consider your risk appetite.
Now you should look at risk in a very real and practical way. New and enthusiastic investors will say they can invest 80% of their salary every month, that is great, but is that sustainable?
Sure, the long term benefits are great, but what about taking short vacations to keep your mind fresh and on track? End of the day, what is the use of committing to a strategy that will suck the fun out of life?
Investing is not about being miserable while saving up almost all your income, it is about finding the right balance. Granted, short term gratification gets you nowhere, but at some point, realistically speaking, the mind needs a break. At which point, one must enjoy a little bit of what we are working for.
Risk appetite is very personal. We all can take risk, but at different levels. Most people feckup by thinking if they copy the risk management strategy of a successful investor, they will succeed. What they do not realize is that risk management strategies are based on personal income and expense dynamics and that is not something that you can copy even if you want to.
How much risk can YOU take? It is not about how much you want to. It is about how much you can.
Simply put, consider a 10% risk. A man earning 100k can take a 10k risk but a man earning 50k can only take a 5k risk. This is the basic fundamental thought behind risk management.
Now, if we consider the personal expenses and age specific financial goals, factor in future career paths and potential earnings, we reach an immensely personal decision which must be taken only after carefully calculating those metrics that can potentially impact the net worth of an individual.
Even age plays a role, consider this, an 55 year old investor cannot afford to take as much risk as a 25 year old investor because, (statistically speaking) a 55 year old does not have much of a career path left to regain a potential loss (Colonel Sanders, the founder of KFC is an exception).
Zeroing in on a calculated risk appetite is a pivotal factor in any investment strategy.
Analyzing the growth potential of sectors is also absolutely crucial to any kind of investing strategy. For example, if you had recognized the growth potential of the IT sector in the early 2000’s and invested accordingly, your investments would have shown amazing growth by now (2020).
Analyzing the growth potential of sectors is important because humans as a race are in the middle of a progressive economy wherein there are new discoveries being made and more and more products are finding their way into people’s lives. This spells opportunity for investors that can recognize trends in the global supply and demand pipeline.
For the sake of explanation, let us consider another example. 2020 brought upon us a raging pandemic (which technically started towards the end of 2019).
The coronavirus brought the economy of the world down to its knees. Quite literally. At least in the Indian markets, the month of March saw a never-seen-before dip as all functions contributing to the economy came to a screeching halt with the announcement of the national lockdown.
Talking about the rest of the world, travel is completely shut down and quarantine has been implemented in most countries. At such a time when the economy of the world is stumbling around looking for balance, even a test that gives quick results will be a game changer.
With quicker test results, airports will be much more equipped at stopping incoming travelers laden with the contagious virus. This will promote travel, open up critical local functions and maybe the economy of the world will see some recovery.
Which sector can develop a test / medicine / vaccine? The pharma sector. At such a time, making investments in the right pharmaceutical company will get huge returns in the short and long term solely due to the demand created because of the pandemic.
Diversification is key. There goes the age old saying – don’t put all your eggs in one basket. What if the basket falls? Or has a hole in it? By diversification I mean diversify into asset classes, not just buying 5 different stocks in the market.
What are asset classes? Imagine you have eggs you want to keep safe. Where could you keep them? You have a basket, a safe, a cupboard, a fridge, a drawer, etc etc etc. Your eggs can be stored in all of these. Now, all of these will go through different conditions that will adversely affect your eggs.
Consider this – Real Estate and Gold are both assets, but are different asset classes. Diversifying into different asset classes at different times throughout the economic cycle of the world could be adversely beneficial to an investment strategy. How?
Simple explanation. Let’s consider the current situation. The economy of the world has taken a significant hit. Markets everywhere are falling due to the lockdown brought about by the coronavirus.
Spending has taken a hit, people are not spending at all, workplaces are closed down, real estate moguls are not being able to cope with the continued costs without the rental income and prices all over the world are going down. In other words, if consumers are spending, real estate is booming.
At such a time, when the whole economy is facing a drawdown, when stocks and even real estate to some extent have taken a hit, what is the one asset class that has locked in significant gains?
Gold. The price of Gold has shot up over the course of the first half of 2020 and there could be more to come. Why is gold going up? The simple explanation is that gold is the oldest currency mankind has known and there is a limited amount of it. It is thus regarded as the “safe haven currency” of the world. Investors have been known to have liquidated assets and move their money into gold at times of recession.
In 2020, when the economy of the world was is smithereens, gold was seen crossing its all time high of 1921 / troy ounce of gold and move into the 2000’s.
Diversifying into different asset classes is something that must be done with extreme caution and an in-depth understanding of the different financial instruments in use.
I hope you found value in the post!