As global economies face the pandemic’s backlash, learn to navigate the stock market better.

As financial markets were infected by coronavirus worries, stocks tumbled. The 500-stock index of Standard & Poor dropped 34 per cent in about a month from its all-time high. 

You might have dealt with a similar scenario if you follow finance-related news in Malaysia or regularly check what’s happening on the Kuala Lumpur stock market.

Before you part with any of your hard-earned money in 2020, there are a few basic things you should know about investing, as well as some general ideas and techniques that make finding winners and protecting yourself against disaster if you make an error more likely.

Don’t panic if you see volatility

If the market is volatile, investors probably react by panicking and making speculations. In cases like this, it is essential to not be affected by fear and to not do irrational things. Investors may consider purchasing a stock at a lower price, but should not sell out in panic. They should instead use this volatility period to reassess the stocks in their portfolio.

A person wants to invest in a specific stock in the first place often for many reasons. If the basic values of why you have decided to invest in the stock are clear, then maybe you should stay invested. But if you’re not sure of a particular investment, however, please meet with your  licensed financial planner to decide on a course of action to exit.

Remember, market volatility is only short-term, don’t panic-sell if you haven’t changed your long-term market investment targets.

Avoid buying unless you can hold for three years

If in response to falling prices, you buy up stocks and you find that prices just keep falling even farther, you have to be capable of holding on to your investments for at least three years to enable them to recover. You might feel like selling for several reasons (like being easily frightened or if your broker is issuing a margin call). The bottom line is that you shouldn’t buy in a stock crash if you’re not even financially and temperamentally prepared to hold on to your investments for at least 3 years.

Stocks have the potential for a high yield rate, but such returns only materialize if you are ready to hold during volatility bouts. Experts generally suggest holding a position to cope with short-term market value losses for at least three years.

Don’t be tempted by low prices

Investing in the market is not advisable whenever the stock market is volatile or just because prices are low. That’s because there is no certainty that in the future a stock with a low price will rise in value. The price may go even lower and you might probably wind up in a value trap.

You have to analyze the fundamentals of the stock and track records. Look at factors such as revenue growth, profit margin, earnings price, debt-to-equity ratio, etc., and its potential for the future. If the stock exhibits a history of risk and volatility it would be best to not invest in it.⠀

Technology could reinforce your portfolio

For example, Microsoft (MSFT, $179) had a $134-billion war chest in cash and short-term investments at the end of 2019. That is enough to provide an appropriate cushion in an economic downturn, says CFRA analyst John Freeman.

Microsoft’s Windows operating system still runs nearly 80 per cent of desktop PCs around the world. Even so, the future of the firm lies in its massively lucrative cloud business, which in the last quarter of 2019 compensated for half of the company’s overall revenues. Part of that business, the Azure cloud service provided by Microsoft, has grown faster than Amazon.com’s AWS, the number-one player in the field. ⠀

Analysts expect revenues to rise over the next three years at an annualized percentage rate of mid-teens.

Payment providers might see some growth

If anything, the pandemic could speed up the global trend toward electronic mobile payments. Well before the coronavirus outbreak, analysts predicted electronic transaction volumes to rise by 2022 by an average of 14 per cent per year. For example, Visa’s extensive payment network has essentially reached widespread application in most developed markets. This gives it an advantage over smaller competitors when it comes to e-payments. 

However, consumers will spend less in a recession, and Visa shares can suffer as revenue and income drop over the short term — providing investors with a favourable entry point for a long-term view. Shares are down 20 per cent from their February high of $170, but after a March low of $135, they have managed to regain some ground.

You might regret some decisions, and that’s okay

Sure, planning your move can be easier whenever the markets are calm and collected. People are more likely to become nervous about uncertain stock markets. You also need to get to grips with the fact that no matter what direction you take, at some point you will probably feel a certain degree of disappointment about not doing things differently. You’ll probably almost always be left with a stock you wish you’d sold earlier, or scratching your head over one that it may have been better to buy.

The objective is not to make sure that every call you make is done perfectly. Not even the experts can do that. It is important to keep in mind that stocks have fallen in the past many times, and they have rebounded all the time.

 

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What other rules do you follow when it comes to investing in stocks?