Written by: Paul Werlin, President, Human Capital Resources, Inc.
We know the pandemic’s impact on the US and the world isn’t over. No one knows if and when a vaccine will be widely available, if there will be flair-ups and new hot spots as states reopen or if the virus will reemerge in the fall. Yes, the stock market has recovered a large amount of its losses and interest rates are at historic lows, the economy as a whole has been significantly damaged and no one knows how long it will take to “get back to normal.”And some industries — airlines, cruising, hotels, restaurants and many others — may take years to recover.
So, while there’s still much uncertainty, there are several important lessons about investing we can learn from this crisis. Perhaps first and foremost is: don’t panic! Every major study on investing strategies has shown that trying to pick market tops for selling, and bottoms for buying isn’t possible. And invariably, the average investor winds up selling too low, and buying too high. The best strategy has always been to buy quality companies and hold them for the long term. Now that doesn’t mean you shouldn’t make changes as a company’s fortunes or the markets change- you should. But knee-jerk reactions to buy or sell almost never work out in your favor.
Another valuable lesson for this crisis is the importance of diversification. While just about everyone saw losses in their stock portfolios, quality bonds, gold, and several other asset classes have held up well. Imagine if you’d had all your money in airline or cruise companies?! And, along with diversification, smart investors try to improve their holdings, or increase their dividend payouts when prices of stocks are lower. The best time to buy quality companies is when everyone else is panic selling.
And speaking of dividends, many investors who own high-dividends stock are now sorry they didn’t spend more time looking “under the hood” to make sure these companies had the financial strength to maintain these dividends. When the bluest of the blue chips are paying only 3% or 4% dividends, you need to understand how a company can pay 10% and higher. Always remember that if it looks too good to be true, well, it might just be.
We’re living in a time of great uncertainty about so many things. The virus, relations with China, exploding government spending, an upcoming election, unprecedented unemployment and on and on. History has shown us time and again, that we will get through every one of these, but guaranteed, there will be others that replace them. But a well thought out investment plan (with the help of a professional), can weather all of today’s storms and the ones that are bound to come in the future.
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