Investing During Uncertainty

Joudy Elhadidy
January 7, 2021

According to the United Nations Conference on Trade and Development, Global Foreign Direct Investment dropped by 49% in the first half of 2020 compared to 2019.

The economic shock and uncertainty led many investors to lose their money, hold their investments, or pull them back.

Although the crisis had a disastrous impact financially, many investors still chose to make investments. Some of them said that this could be the best time to invest as it is a turning point for the financial market.

Here’s how to invest during the crisis :

Choose wisely the industry which would benefit the most from the crisis

Although the pandemic has affected the stock market as a whole, it is worth mentioning that different industries have been affected differently. Some industries have seen tremendous growth in 2020 - these include industries such as healthcare, technology, and food delivery platforms. Industries like airlines and hospitality are experiencing dramatic losses that could be terminal to some companies. To make a wise decision regarding your investment, you have to invest in industries that are operating in your circle of competence - invest in companies in familiar industries.

According to Fox Business, it is important to make sure that the chosen company meets the 4M’s, which stand for meaning, moat, management, and margin.

Meaning: You clearly understand what the business offers and its added value to clients.

Moat: The business needs to have a strong moat to be able to go through long term growth and ups and downs. A strong moat means that the company is economically viable and has a competitive advantage in the industry of operation.

Management: Evaluate whether management is efficient or not. Does the board of directors have a high track record of honesty, execution, and transparency with its stakeholders?

Margin of safety: Investors should purchase securities when their market price is lower than their intrinsic value - which is usually 50% off the price. For example, if a stock is trading at $100, we would buy it when it falls to $50.

Invest small amounts over time

It is hard to predict how markets react during a crisis. That’s why many investors do not take any action and wait until the market recovers. For those who are not willing to invest in risky markets, this is the best strategy to follow: set up an automatic transfer with smaller amounts to your investment instead of buying all stocks at once.

Avoid investing with borrowed money

Buying stocks with borrowed money can be very risky, especially with all the instability due to the pandemic. Imagine investing with borrowed money, and the market crashes again, taking your investment portfolio down with it. You would want to avoid going through any financial risk. That’s why it is better to invest with the money you have.