How to invest in uncertain times
Periods of panic and/or euphoria bring to mind the recurring question of how to control one's emotions and avoid making hasty decisions. There are no general recipes for this because everyone has their own personality shaped through their experience, knowledge, etc. For example, a person who likes extreme sports will have a different concept of risk than, say, someone who likes more traditional sports.
The first thing is to try to remain calm and not get carried away by your emotions in these volatile and complicated times, which will probably continue to condition the behaviour of the markets in the coming months.
We believe that two basic principles should not be forgotten when investing:
- The importance of protecting your capital. During periods of turbulence in the markets trying to minimise your losses is critical because the heavier they are, the more difficult the recovery. For example, if the value of your investment falls by 50%, the increase will need to be double that percentage, i.e. 100%, to recover the total loss. This is what is known as the ‘base effect‘.
- Crises present the most significant investment opportunities. The problem is that most investors don’t take advantage of the excellent opportunities that arise. Either they don’t want to invest because there is too much turbulence, i.e. fear -or even panic- reigns, or they accumulate significant losses and are unable to take advantage. Hence the importance of protecting your capital, as we explained in the previous point.
In the current context, with high volatility in the markets and uncertainty about how the coronavirus crisis will evolve, we see value in combining two different, but complementary strategies that we think will bear fruit in the coming months:
- The first strategy is diversification, which consists of investing in corporate debt issues from the most robust and solvent companies. This will provide an attractive recurring coupon, taking into account the current context of zero or negative rates, while providing stability to your portfolio. Besides, if there are significant falls in risky assets, whether because of an escalation of coronavirus-related problems or any other reason, you’ll be able to sell these defensive positions and buy other assets that have been heavily penalised and therefore offer potentially high returns in the long term.
- The second strategy consists in investing in assets that benefit from highly volatile financial markets: in other words, pursuing an active management strategy that buys equities at moments of maximum tension and reaps the profits when the markets experience a significant recovery and investors become complacent again. However, it’s important to remember that the stock market usually does the opposite of what most investors expect. While it tends to rebound decisively after periods of widespread panic among investors (as we saw at the end of last March), the risk increases significantly during phases of euphoria when everything seems to suggest a favourable environment for risky assets.
Due to the current crisis situation we are living, we are often seeing in the media the terms "inflation" and "deflation". Both terms can be confusing on occasions, so here we provide a brief and simple overview to give you a basic idea of the two concepts.
The immediate answer could be that a low unemployment rate is good for the stock market. In the last few years, the unemployment rate has registered a marked decrease in the main geographical areas and has reached historical lows. One of the questions arising from these circumstances refers to the impact of these employment rates on equity performance.