The COVID-19 pandemic has thrown markets into a frenzy.
The month of March was likely the most volatile period in stock market history.
Traders were zig-zagging in and out of the markets, causing daily swings of up to 10% in the S&P 500.
COVID-19 is indeed a black swan event.
No one really knows what will happen and how the market will pan out in the short-term.
With so much uncertainty, what should long-term investors do now?
Focus on Things That You Can Predict
There are many things we can’t predict in the stock market.
But investing is not about accurately predicting everything that will affect stock prices.
Instead, it’s about focusing on stuff that you can predict.
It’s about investing in companies that are likely to succeed in the long-term.
Terry Smith — founder of Fundsmith, which is the manager of the UK’s largest fund, Fundsmith Equity Fund — wrote in a recent letter to his investors:
“What will emerge from the current apocalyptic state? How many of us will become sick or worse? When will we be allowed out again? Will we travel as much as we have in the past? Will the extreme measures taken by governments to maintain the economy lead to inflation? I haven’t a clue. Rather like some of the companies we most admire, I try to spend very little time considering matters which I can neither predict nor control and focus instead on those which I can affect.”
Don’t Forget That the Stock Market Is the Best Place to Invest for the Long Term
In times such as this, it is easy to forget that the stock market is actually the best place to invest your money for long-term returns.
According to data from NYU finance professor Aswath Damodaran, US stocks have outperformed bonds and cash by a wide margin over the long run.
From 1928 to 2019, US stocks produced an annual return of 9.7%, while bonds (10-year treasuries) had a 4.9% return per year.
In a recent video, Motley Fool co-founder David Gardner shared:
“From day one, when we started the Motley Fool 27 years ago, we said three things. Number one, the stock market is the best place to be for your long-term money. Number two, the stock market tends to rise 9 to 10% a year. That includes every bad week, quarter, month, year, bear market… and number three, make sure that you are invested in a way that you can sleep well at night.”
Don’t Try to Time the Bottom
One of the most-asked questions among investors today is “Have we reached the bottom?”
I think that nobody really knows the answer to that.
But it should not stop us from investing.
If you insist on only buying at the trough, you might miss a few good opportunities.
In fact, I’ve heard of stories of investors who planned to enter the market at the bottom but missed out when their preferred-bottom never came.
As stocks rose and got more expensive, they couldn’t bring themselves to buy and missed out on years of gains.
Billionaire investor Howard Marks mentioned in his latest memo:
“The old saying goes, “The perfect is the enemy of the good.” Likewise, waiting for the bottom can keep investors from making good purchases. The investor’s goal should be to make a large number of good buys, not just a few perfect ones.”
But Remember to Pick the Right Stocks
If you intend to invest in individual companies rather than an index-tracking fund, then it is important to remember that not all companies are created equal.
The well-followed S&P 500 index in the US has risen steadily over the long-term but a lot of its return can be attributed to only a handful of outperforming companies.
In fact, my blogging partner Ser Jing reported an interesting statistic in a separate article.
In it, he wrote:
“ A 2014 study by JP Morgan showed that 40% of all stocks that were part of the Russell 3000 index in the US since 1980 produced negative returns across their entire lifetime.”
That’s an astounding statistic and goes to show that simply investing in any random stock will not guarantee you positive returns, even if you hold for the long run.
Picking the right companies is as important as choosing the right asset class to invest in.
It is perhaps even more important for times such as today, where poorly-managed companies with weak balance sheets are fighting for their survival.
As Warren Buffett once said, “Only when the tide goes out do you discover who’s been swimming naked.”
Stay Calm and Keep Investing…
It is an understatement that markets are volatile.
We are also likely going to see sharp drops in earnings from many companies in the next few quarters.
Already Starbucks has guided for a 46% fall in earnings for the first quarter of 2020 and I expect to see many more companies reporting similar if not worse figures than this.
However, over the long-term, I expect earnings for well-run companies to return and for life to eventually return to normal.
Instead of focusing on the next few quarter results, I am keeping my eye on long-term results and which companies can survive the current economic standstill.
This article first appeared on The Good Investors and is part of a content syndication agreement between The Good Investors and Seedly.
The Good Investors is the personal investing blog of two simple guys, Chong Ser Jing and Jeremy Chia, who are passionate about educating Singaporeans about stock market investing.
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