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How to Invest during a Financial Crisis

Posted by Alden Hui on March 20, 2020
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With the oil price war and coronavirus outbreak, the stock market is taking a huge hit. The majority of companies have turned to online business and remote work where possible. Due to the unpredictability of the virus, quarantines may continue for a while. How long? Nobody knows. This could impact many things (layoffs, missed payments, debt accumulation, etc.) On the same note, experts do not foresee a short term resolution to the oil and gas disputes either. All these factors could lead to a recession further down the road. There is no way to predict the future but there are tried and true investing practices in times of financial crisis. 


Keep calm

Around the world, governments are encouraging citizens to "flatten the curve" by staying home and only leaving when necessary. This will help to slow the spread of coronavirus and ensure our healthcare system is not overwhelmed. The exponential growth rate of the virus has taken a huge toll on many places in Europe, where we can learn from. As a result, the media is pushing news of coronavirus everywhere. Although social isolation is important, be sure to check up on your mental health. This applies to more than just daily life but also your investment decisions. 

Define your investing goals

The basics of investing still apply at any time. Define and understand your goals. Do you want to retire in 25 years with your current lifestyle? How much risk are you willing to take? Think rationally and avoid taking risks you will regret. A clear goal helps you focus on the necessary objectives to get there. 

The long term outlook has not changed

Even with all these negative factors going on, the market will return, as it has with any financial crisis or depression of the 20th century. If you are planning to hold your investments for 20+ years, the horizon has not changed. If you are planning to retire soon, you should prepare your portfolio to be more conservative. Adjust as needed. 

Dollar cost averaging

Currently, many stocks are at a "discount" because of panic selling. But it is impossible to perfectly time the lowest dip. Before you invest money into the stock market, you should consider dollar cost averaging. This strategy refers to placing a fixed amount into an investment on a consistent basis. When the market is volatile and unpredictable, it is better to follow a dollar cost average strategy for your investments instead of timing the market with one lump sum deposit.  

Look for opportunities 

Dropping stocks are a good opportunity for long term investors to buy stocks at lower prices. The pandemic has caused panic selling, allowing for many golden opportunities on the stock market. Blue-chip companies, well established, financially stable companies, are able to be bought at a "discount". These are (open to debate but typically reference) companies like Microsoft, Amazon, and Apple. There are also other opportunities with higher gain, but come with higher risk. One notable example, Disney, recently had to close it's theme parks leading to a plunge in the share price, lower than ever in the past 5 years. Do you expect Disney to come back over the next few years? Nobody knows for sure, but there is an opportunity to be had.. which leads into my next point.  

Invest in what you know

At the end of the day, there are thousands of opportunities no matter the economic times. Be sure to choose companies that you have experiences with or trust in. At least you will have a better idea of who you are dealing with, what they do, or whether you can spot issues with the company. For example, if you bank with TD, it may be better to invest in them over RBC or another bank since you are familiar with their products and any potential shortcomings. 

Avoid speculative companies

Pick low debt, good cash flow, and strong balance sheet companies. Companies with high debt paired with slower revenue due to recession have a higher chance to go bankrupt. Another general rule of thumb is to look for companies that sell essential items (grocery stores, alcohol manufacturers, consumer goods, funeral services). Luxury companies will fair poorly during times with low discretionary income. 

Think about industries

There are industries which are directly impacted by coronavirus such as brick and mortar retail, tourism, and hospitality. Online services would be less affected. Also keep in mind the indirect and longer term impacts that coronavirus may play into industries such as real estate and housing as people may struggle to pay their mortgage or rent due to job loss.

Don't invest your emergency fund 

An emergency fund should be liquid and easily accessible. It is common to keep your emergency funds inside of a High Interest Savings Account because it is easily accessible and will never be lost to a poorly performing investment. Most people recommend an emergency fund of approximately 6 months of expenses in the event of a layoff or other emergency situation. This should be your primary focus before you even start investing. Those doing well will be tempted to use up this fund for investing, but remember, hard times can strike at any moment.

Invest in a Health Spending Account

If you are a small business owner with ongoing medical expenses, a Health Spending Account is one of the best investments you can make to save on medical costs. See if the plan is right for you with this savings calculator:

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Topics: financial planning, investing, stocks