Investors who were looking forward to a bullish or otherwise non-volatile spring received a rude awakening amid COVID-19. The efforts to contain the Coronavirus have taken an extreme toll on Main Street and Wall Street.
Not only are people across the globe looking for an end to the global pandemic, but investors are looking for the bear market to end, and find a bottom. Despite the staggering decline, there may be a silver lining to the current market, from a purely investing standpoint.
Investors are seeing lower stock prices in many sectors across the markets and what appear to be “discounts” for highly sought-after stocks. With the right strategy, you can potentially make some great investments.
Because this can be a confusing environment to navigate alone, the Global View team, some of the more-established Carolina financial advisors, wanted to offer some guidance.
Remember How Markets Work
During market declines, it’s important to remember how markets operate and what drives prices. Economic statistics like unemployment and wage growth are lagging indicators, based only on past activity. Global stock markets are leading indicators, reflecting how investors feel about the future of a certain investment. If the stock market rises, that means, on average, that investors feel confident about the future and are willing to invest now, hoping that their investments will grow over time. Conversely, a market decline reflects a lack of optimism.
What appears to be a discount for a particular stock could actually mean investors suspect performance challenges in the company’s future and are quickly selling their investments now before the company’s performance worsens. If you’re looking to make an investment, it’s best to investigate what specific factors are worrying investors and how long it can take the stock to recover, if it recovers at all.
Sometimes, investors overreact, and in other situations, some stocks may fare much better than others during a crisis. The key is to cut through the noise and identify quality.
If you’re not an expert in the financial services industry, it’s wise to seek a trusted financial advisor who does.
How to Spot Investing Opportunities
Money is an emotional subject for most people. When investors see the market drop, they react. When they see stocks rebound, they react again. But this can be dangerous, and because no one can accurately time the market every time, there are a few key things to watch for to spot an opportunity.
Quality Over Everything
High-quality stocks are able to bounce back from poor performance despite market headwinds, or avoid headwinds altogether. In light of the COVID-19-driven decline, healthcare stocks are faring very well, and in some cases, recording double-digit growth. For stocks in sectors that have been pummeled by the bad news of the pandemic, quality is still king. You don’t want to jump on a sinking ship, and get stuck owning a position as it continues to sink.
If you’ve spotted a stock that may be worth buying, it’s best to take a look under the hood. Since the pandemic started rattling markets, many stocks have issued updated forward guidance on their earnings, predicting a severe decrease in their earnings and revenues. Fortunately, this may indicate that if a stock isn’t experiencing serious problems beyond COVID-19, the stock price may normalize once the crisis is stabilized. It may be easier to spot the “bottom” in some cases, so it may help to take a closer look at the hard numbers in a company’s prediction.
Trading Versus Investing
While trading and investing are often used interchangeably, they can have different meanings. Making an investment in a company typically means that you’ve done your homework and have a strong understanding of the company’s business model, strategy and more. True investors are willing to take a financial risk now on a particular endeavor, because they are committed to the future performance of a particular endeavor in the long-run.
Trading, on the other hand, can involve rapid transactions, basing decisions on momentum, patterns and short-term trends. Think about your investing intentions during a near-financial crisis to better determine your expected time horizon and expectations for a particular investment.
Again, this can be difficult, so if you’re in North or South Carolina, reach out to our Carolina financial advisors for advice.
Selling in Bear Markets
If you feel the need to sell your investments because of serious volatility, consider waiting or speaking to your advisor first to determine the best course of action. In some cases, taking no action can be the best choice. Panic selling, especially in the thick of market uncertainty, can cost you dearly by turning your potential losses into real losses. If you truly must sell an investment, it’s best to have a strategy.
Keep Uncle Sam in Mind
When determining an investment to sell, consider the tax implications. You can look through your retirement accounts (non-taxable) and non-retirement accounts to determine the best options. If you’re selling from a taxable account, consider dividing your sell orders between stocks that have losses and stocks that have gains. This can potentially minimize your capital gains consequences.
If you are considering selling an investment and withdrawing money from your retirement account, it’s wise to speak with a financial advisor to choose the best course of action before unravelling any portion of your portfolio.
Run it By Your Advisor
Carolina financial advisors are a great resource with whom you can share investing ideas, especially when market prices are low. A financial advisor can help you complete your due diligence and share ideas with you about the quality of a particular investment. Most importantly, a financial advisor can protect you from making poor investments.
Bear markets are fraught with uncertainty and risk. But there are still opportunities to make solid investments and continue building your wealth. With the right strategy, a bear market can be the investment edge that you’re looking for.