How will Coronavirus Impact You Financially? has to be the question on everyone’s’ minds right now. The fallout of the global pandemic COVID19 – or Coronavirus as it is more commonly being referred to – has touched almost every aspect of South African life, including the financial sector.
Led by the failure of the US stock market, it seems that no matter how the pandemic plays out the world’s markets are heading into bear territory. But what does that really mean for the average individual investor? Are the investments you have been making for your retirement about to become worthless? The answer, fortunately, is no. They are just going to change. Read on to find out more.
How will Coronavirus Impact You Financially?
What Is a Bear Market?
When the world’s stock markets fall for a prolonged period of time, losing the value of 20% or more over a period of at least two months, investors call this a “bear market.” Investors measure the market’s decline by looking at the percent decrease in the stock price of market indexes, like the Dow Jones Industrial Average (DJIA) and Standard & Poor’s 500 (S&P 500).
Pessimistic, frightened investors cause an increased sell-off of stocks, which reinforces the downward direction of the market. A bear market is the opposite of a bull market, in which stock prices persistently head upwards and the kind of market the world had been enjoying before the Coronavirus reared its ugly head.
How will Coronavirus Impact You Financially?
What Drives a Bear Market?
A sustained decline in stock prices can happen for any number of reasons, such as investors panicking over economic news, or, in this case, a global pandemic that no one has a timeline for and can begin to accurately access the long term effects for the world.
A bear market experience can scare would-be investors away from investing; you never know when a bear market will materialize and it takes psychological and financial fortitude to ride out the storm. Ironically, this fear alone can sometimes keep a bear market alive.
How will Coronavirus Impact You Financially?
A Downward Influence on Investments
Generally, a bear market will cause the securities you already own to drop in price, perhaps by a lot. The decline in their value may be sudden, or it could deteriorate slowly over time, but the end result is the same: The value of your portfolio holdings drops.
During a bear market, some investors prefer to focus on two fundamental principles that allow for taking advantage of the current market situation. First, a bear market is only bad if you plan on selling your stock or need your money immediately. If you are 35 and investing for your retirement, that is far from the case. Your money has at least three more decades of work to do before you ‘need’ it, so the panic felt by short term investors should not be yours.
Second, falling stock prices and depressed markets are friends of the long-term value investor. Value investing was first developed at Columbia Business School by two professors, Benjamin Graham and David Dodd. Value investing was later popularized by Warren Buffett.
As a value investor, you typically invest long-term with the intent to hold your shares for decades – as you would when investing for retirement. A bear market creates a great opportunity to accelerate your returns over longer periods. With lowered stock prices, you can make periodic, fixed-amount investments over time in stock and bring down the average cost basis of your holdings and shorten your portfolio’s recovery period once the bear market eases up.
This approach is also known as “dollar-cost averaging.” You’ll end up buying more shares when the price is down and fewer shares when the price moves up.
If you own dividend-paying stocks, reinvesting those dividends acts as a “return accelerator.” The reinvested dividends reduce the cost basis of your portfolio as a whole so the quoted market value needs to increase by a smaller degree to reach break-even than your investment’s original cost.
How will Coronavirus Impact You Financially?
Making Lemonade From Lemons
“Value investing” involves choosing stocks based on the underlying company’s operational quality and ability to generate solid earnings over time. These company stocks make good long-term holds and will likely still have stable earnings 10 or 20 years down the road.
Even if the market doesn’t currently recognize a company’s worth and undervalues its stock, if the company continues to make money as an operating business with solid financial and other characteristics, this says more about the intrinsic value, or essential nature of the company, than that reflected in its current share price.
How will Coronavirus Impact You Financially?
The Bottom Line
Some investing experts believe the market is not perfectly efficient over periods of less than many years. So they see falling stock markets like a clearance sale at their favorite store; they load up on carefully researched stocks while they can because history has borne out that prices will eventually return to more reasonable levels, provided the company earnings materialize.
For the smaller investor value investing can be confusing. But with the help of a good financial advisor facing off ‘the bear’ may not only be nowhere near as bad as you thought but also end up being an advantage in the long term. Today speak with one of our Independent Financial advisors to get the best advice.
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