The war in Ukraine – which is now in its sixth week – has created great uncertainty around the world. While the human cost of war is clearly the highest price to pay, the past few weeks have proven incredibly shaky for investors.
European equities in particular have been hit hard in recent weeks, although US stock markets have shown relative resilience of late. Some investments — like certain defense stocks and commodities — rose sharply during the crisis; others, like some travel-related stocks, have fallen. The unpredictability of this war – coupled with concerns about the impact of sanctions and how far the war could spread – is weighing heavily on investors.
So what should investors do in times of crisis like this?
1 sit it out
“The hardest thing for investors [at a time of crisis] is nothing,” said Nick Charalambous, chief executive of financial advisor Alpha Wealth. “Remember that many of your investments are long-term and can survive this situation. When Covid happened over two years ago, those who couldn’t react fell in [stock market] Of value were those who benefited the most.”
According to Aidan Donnelly, Davy’s head of equities, a majority of the losses investors suffer come from panicking about their exposure to different types of investments at the wrong time.
“In times of crisis, people tend to panic and react the wrong way,” Donnelly said. “This is a difficult time to invest but there will always be issues like the Ukraine war or Covid – so it’s important to follow some common investment rules [rather than panic].”
2 Don’t try to time the market
“The most important thing for any investor is time in the market – not trying to time the market,” said Alan Werlau, Barclays’ head of investments. “In times of extreme stress, investors shouldn’t try to time things. People who exited investments during a period of stock market volatility could regret that decision within five days. Wait and see what happens when the fog clears.”
3 Stick to the budget
A prudent investor will have a financial plan in place before investing his money – setting out his investment goals and desired level of exposure to different types of investments.
“The question [during times of uncertainty] is not whether you should do something; The question should be: Are you still on track to achieve your long-term investment goals,” said Werlau.
There’s no harm in reviewing your investment portfolio, especially if recent uncertainty has you worried about your investments.
“In times of uncertainty, review what the original rationale for the investment was,” said Vincent Digby, co-founder of Impartial. “If the reasoning still holds true, you should feel more comfortable holding the investment during times of uncertainty. Realize that time is your true friend when it comes to investing. As long as your investments are not overly concentrated or leveraged, there is a clear likelihood that any losses in value will recover over time.”
4 Don’t be a forced seller
A forced seller in the investment world is typically an investor who needs to sell to cut their losses – and who therefore usually has to sell at the wrong time (ie, when they get a bad price for their investment).
“You could become a forced seller if you’re over-invested in stocks — or if your exposure to stocks is higher than your financial plan,” Donnelly said.
“Let’s say your financial plan goal is to invest 60 percent of your investment portfolio in stocks — but you find that your exposure to stocks has reached 90 percent. You may be forced to sell at this point as you are over-invested in stocks. To avoid being forced to sell, keep track of the goals you set in your financial plan and make sure you stick to them.”
5 Sale at the milk market
“If you’re underperforming on your equity exposure budget, use market volatility to reach your goal — and take advantage of market sell-offs in the process,” Donnelly said.
“There are many quality companies that have been hit hard in the last few weeks that you could invest in — as long as you take a long-term view (ie, invest over at least five, seven, or 10 years).”
6 Choose value stocks
Value stocks could be a good place to invest your money for years to come, according to Digby.
A value stock is one that appears to be trading at a significant discount to its intrinsic value. (Intrinsic value of a company is essentially what a company is believed to be worth and is usually based on the company’s financial performance.)
“Over the last 10 years, growth stocks have typically outperformed value stocks,” Digby said. “So you’ve had 10 years of underperformance in the reliable and stable ‘value’ stocks – and that could soon be reversed.”
Growth stocks are stocks that don’t typically pay dividends and where the stock price has risen rapidly over time, according to Digby. For example, the shares of FAANG (Facebook, Amazon, Apple, Netflix and Google) would be considered growth stocks. There are some growth stocks where the stock price goes up even when the company itself isn’t profitable.
“Value stocks typically do well in times of higher interest rates and higher inflation,” Digby said. “Unfortunately, the war in Ukraine will amplify the recent surge in inflation. Inflation will be more persistent and higher than investors have faced in many years. Inflation is likely to drive markets to higher interest rates and higher bond yields, changing the fundamental rules of investing for years to come. We expect value stocks to outperform growth stocks over the next few years as growth stocks are more expensive and will be more affected by rising interest rates.”
Value stocks could be the stocks of banks or pharmaceutical companies “that have fallen out of favor with investors for a while,” according to Digby.
7 Invest in quality companies
“Invest in quality companies — that is, global companies with decent balance sheets,” Donnelly said. “Ultimately investing in companies that are very likely to be around for the long term.”
Companies with pricing power are also typically good investment opportunities in times of high inflation because of their ability to pass rising prices on to consumers. “Invest in companies with strong balance sheets, good growth prospects and pricing power,” Werlau said.
8 Think about health and green
Many healthcare stocks have performed well during the pandemic and could do so for years to come. “Due to the aging population worldwide, there is definitely great potential in the healthcare system in the long term,” said Werlau.
Investments in renewable energy could also do well. The Ukraine crisis could lead to an acceleration of green and renewable energy initiatives across Europe. “Europe and different parts of the world will think more about their energy security [as a result of the Ukraine crisis].”
As such, it might be wise to have some exposure to healthcare stocks and renewable energy investments in your portfolio, but as with any investment, you should do your due diligence beforehand. Healthcare stocks, for example, often face significant litigation risks.
9 Don’t speculate
Speculative investors usually buy something hoping that the price will increase in the near future. They are typically short-term investors who will sell the investment quickly if they have the opportunity to make a profit. While speculative investing can result in lucky breaks when a stock or investment goes in your favor, large losses can result when the investment goes in the wrong direction.
“Many commodities have performed well recently and will likely continue to do so for some time – but investors should try not to get too caught up in the speculative game,” said Charalambous.
According to Digby, the more speculative investments tend to perform poorly in times of high uncertainty.
“Speculative investing could include growth stocks where the company behind that stock has not made a profit. If investment conditions get tougher, the tide could turn for these stocks. Other examples of speculative investing could include cryptocurrencies, special purpose acquisition companies (SPACs) and ‘meme’ stocks, which have a high proportion of small, relatively inexperienced retail investors.”
A SPAC is a businessless entity formed to raise capital through an IPO with the aim of purchasing an existing business.
A meme stock is a stock that has suddenly gained popularity on the internet or social media.
10 Swallow the Volatilidude
Short-term bouts of volatility in stock markets are to be expected and, in general, investments recover from losses over time, although anything that is consistently losing money should be re-evaluated.
“There’s always going to be something in your portfolio that’s going to give you a headache, but six months from now it could be working beautifully and something else is going to give you a headache,” Donnelly said.
“Equity markets are the best for long-term returns. But better returns come at a price: volatility. If you are not willing to pay the price of volatility, you cannot reap the rewards of financial returns.”
https://www.independent.ie/business/personal-finance/investing-in-times-of-crisis-ten-tips-on-what-to-do-when-war-and-uncertainty-hit-41512228.html Investing in times of crisis: ten tips on what to do when war and uncertainty strikes