Many people talk about the 2008 financial crisis to find similarities to understand and anticipate the aftermath of the financial shock due to the coronavirus. However, the situation is not completely comparable. In 2008, the real problem was excessive debt; the solution was, therefore, to support the banks and to recapitalize them. This time around, cutting interest rates will not change much. If you intend to start investing your money the smart way, or you are already investing but need advice in these new circumstances, here are some useful tips.
1. Take stock of your assets
Before getting started, you have to think about taking stock of all your assets and be sure of your objectives to ensure that the strategy put in place is consistent in terms of risk level and time horizon with your investor profile. Also, you have to resist the temptation of wanting to look at the balance of your investment portfolio too often but also not to spend too much time reading, or watching, the media.
2. Diversify your assets, but to some extent
When building an asset strategy, it is imperative to diversify your assets, but be careful not to rebalance too hastily during a period of crisis at the risk of making bad choices.
Some investors might be tempted to sell their shares and reinvest some of that money in other classes of risky assets, such as crowdfunding or real estate. Diversification is a major component of good risk management of one’s assets. But beware! In the current period, it is difficult to have good visibility on the impact that this health-related crisis will have on other classes of assets.
3. Stick to your long investment strategy
Let’s suppose that your stock market portfolio has fallen sharply. But as you have just read now is not the time to panic. You don’t need this money in the short term, so there is no major problem. Do not sell and continue to implement your strategy regularly while taking advantage of this period to strengthen some of your positions at a lower cost and thus smooth your entry price.
This crisis is also a reminder: when you reach the end of your investment horizon, that is to say, the date on which you think you need this money, the level of risk will have to be reduced more and more. Therefore, gradually sell your assets with low-risk tolerance and either keep cash or invest in low-risk assets.
4. Use ‘’dollar-cost averaging’’ investment strategy
The current period is favorable for a new investor wishing to go public with a long-term approach and the wish to build a diversified portfolio. To overcome the uncertainty surrounding the duration of the crisis, we advise you to go gradually by doing Dollar Cost Averaging. This strategy is focused on dividing the total amount of your investment into several periods with the aim to decrease the volatility impact on the overall investment. Let’s suppose you want to invest € 500.
Do it 3 or 4 times, spacing out the investments of several days or weeks, rather than all at once. And if you have a large amount to invest, invest there for several months. It will allow you to smooth your entry price and therefore reduce your average cost price if the decline continues.
5. Control your overemotional reaction to the market
For a long-term investor, it can certainly be a difficult period to live mentally. Still, you should not panic and on the contrary, take a step back to fully understand the opportunity that presents itself, and avoid making decisions in a panic. By keeping your eyes riveted on your wallet in the red or in front of a continuous news channel announcing the end of capitalism, you risk giving in to your emotions and selling at the least opportune moment. Keep in mind that some companies will ask for a postponement of the payment of their rent for several months, which will have an impact on the returns in 2021.
Final Thoughts
At every moment you should know how much risk you can handle. Having healthy emergency funds and clear financial goals, you can always consider investing. Just put on a paper your risk tolerance to compare your ability to withstand losing money and the amount you are going to invest. At any time, you can ask for advice from a professional financial advisor, to get the most of your portfolio and to ensure you are on the right path.