Stocks are falling, the markets are down more than 10% and well into correction territory, and it seems like the end of the COVID 19 coronavirus fallout is nowhere in sight. Should you panic and sell? Far from it.
Investing is easier when the markets are stable in large part because there are less external stressors impacting our decision making. The problem with market corrections and sudden downturns is that this causes the inverse to happen; we get stressed out by our losses, worry, and try to jump ship. Yet historically,
jumping ship is one of the few guaranteed losing moves during a correction.
In fact, behavioral finance research consistently shows that timing the market isn’t effective. The smartest investment banks and hedge funds around the world
struggle to make money with these strategies, so it’s safe to say we should avoid them in our panic.
So is the winning move not to play? Not exactly. As long as your focus is on the long-term and you’re not trying to
beat the market, staying diversified and on track is the historical winning strategy. However, corrections offer a golden opportunity to reassess, refocus, and reinvest.
There’s a reason wealthy individuals and companies come out stronger from downturns than those who react negatively or do nothing: they’re reinvesting. By this point, if you would have saved more money from being invested in real estate or commodities versus equities, that ship has likely sailed. But what you
can and
should do is take advantage of downward pressure on prices while you can.
For example, let’s say you’ve had your eye on a few tech stocks like
Quarterhill Inc. (
TSX:QTRH) or
Score Media & Gaming Inc. (
TSX-V:SCR) and their shares are down because of larger market forces, this would be a good time to take advantage.
Likewise, downturns offer a rare opportunity to reinvest in your current holdings and bring your average cost down comfortably, or to pick up some assets that would give you good diversification coverage for a recovery.
However, it’s imperative to be prudent and not simply bank on inevitable recovery for every stock and sector. Do some digging and verify that the sector or stock you’re looking at are being dragged down by the general market and not by internal factors.
As well, is the sector down because of general risk aversion or because it is directly tied to the cause of the downturn? Transportation stocks like
Air Canada Inc. (
TSX:AC) are down significantly and seem attractive, yes, but they’re directly tied to the ongoing COVID 19 epidemic and it’s too risky to guess what the full impact will be on the stocks (or when they’ll be felt).
That being said, if you feel extremely confident that a sector is currently down because of external factors but that it will make a rebound, a bet on it might be a wise move. Do your homework and due diligence, verify the logic and take out the emotion, and invest if possible.
But a word of advice from financial experts is to
bet on the battle and not the combatants. Picking the “winner” in a sector that will make the biggest recovery and bounce back is hard, risky, and backfires more often than not. Picking the sector itself through a mutual fund or ETF is the tried-and-true method for a reason.
New to investing in stocks? Check out Stockhouse tips on the Best Stocks to Invest in.
For the latest info on hot investment sectors, check out the Trending News hub on Stockhouse.