The last month has been a bumpy ride as the stock markets all around the world have been crashing fueled by panic selling due to the coronavirus frenzy. Markets all over the world have been taking significant hits. In the US, the S&P 500 has been declining even triggering the level 1 market-wide circuit breaker trading halt! while the Dow Jones erased all the 41 months of gains made since president Trump became President in just 18 trading days. On the other hand, the German DAX has erased 6 years of work by the bulls in just over a month! Sadly, Kenya has not been left behind. The market has been on a decline since the coronavirus news however, the market took the biggest hit on Friday 13th March when the first case was confirmed with a 5% decline in a single day triggering a trading halt.
Most of us with investments in the stock markets are asking the question: what should we do? Should we pull out of the market? Or is this an opportunity to even invest more in the market? We can no longer deny the problem around us is real, and the world has not yet found a solution. It’s probable the market may continue on a downward trend but that does not call for fear and panic or withdrawal from the markets but rather to challenge us to financially prepare and prepare than we have ever before.
As I have always stated, volatility in the market is a normal part of long-term investing which is why it is always important to take time to understand how much risk we can take before investing. I know it is usually easier to say I can tolerate high risk when the economy is stable but it becomes another ball game when such epidemics arise causing the markets to tumble and our risk tolerance is put to the real test.
Stay calm, do not obsess about the loss in value of your investments. Nor let social media get you into making stupid investment decisions. Those forwards of ‘ the rich are buying stocks while the poor are buying toilet paper’ are misleading. Know what is important at this time. And that is income. There is an important distinction between wealth and income. Wealth is the accumulated value of the stocks, bonds, real estate, etc. you own while income is the cash flow your stocks, bonds, etc. provide e.g. dividends you receive periodically.
Over the last few weeks, the wealth you accumulated over time in investments is what has eroded in value however, that’s not what is of importance currently. What matters most right now is your cash flow. Do you have cash coming in? Are you still earning even during the shutdown? And are you confident you will keep earning through and after the shutdown? If yes, you are fortunate. Evaluate your sources of income and plan for it to ensure survival during this period to avoid liquidating your investments in a declining market. Your wealth will return to its value after the crisis has blown over. However, if you do not have cash coming in, investing should be the least of your worries. Start thinking of ways you can generate an income, be creative, even crisis offer opportunities.
I know seasoned investors see this as an opportunity, with the prices of the stocks clearly lower than they were a few weeks ago. For example, in just a month, Safaricom share price has declined over 15% and KCB down by approximately 20% just to mention a few. And yes, I agree with them and stand with the basic rule of investment, buy low sell high. If everything were normal, it would be a great time to invest in the market.
However, there is nothing normal about this period. We have to agree this epidemic is new, big, and completely unknown. We have no idea how long the Covid-19 crisis will be here with us. And as the wise once said, investing when the future is unknown is like venturing into the unknown dark without a torch which is plain foolish. In addition, I also agree with the philosophy of ‘time in the market’, not ‘timing the market’, is often the best approach especially for those new in this investment journey. Hence I do believe, the best course of action as at now is patience. With the market falling at this rate, this is not the time to make any rush investment decisions. Take time to evaluate the situation moving forward, do your research and when the epidemic is under control then you can easily make an informed decision to jump in and invest in the market.
Also, before you invest, do remember, since extreme measures such as shutdowns have been the only option to bring the spread of the coronavirus and the number of new infections down, this will have serious economic implications. Even with the virus being contained, the economy may take time to recover hence the market may not recover as quickly as it crushed. You may need to hold your stock for a period of time before you see any significant increase in value. But again as I always say, investing in stocks is a long term game.
PS: None of the content in this blog is financial or investment advice. It’s for educational purposes only. Please do your own research and/or consult with a professional if you want advice customized to your specific situation.
Tags: coronavirus Covid-19 Investing Investments money Stocks Wealth Wealth Creation