The United States stock market has seen an increase in the number of investors despite the novel coronavirus pandemic. It is not hard to imagine that some people may now be participating because they are at home with not much to do, while others just want to get in on the market rally.
In Jamaica, we have also seen an increase in awareness around our local stock market, the Jamaica Stock Exchange. However, there may be those who are deciding to start investing without sufficient understanding of the stock market.
When one decides to invest in stocks or equities, there needs to a mindset shift which enables a greater understanding of the risks involved and the inherent volatility of market conditions. It is important that investors embrace this reality and align their risk tolerance to their investment goals, to avoid losing significant sums.
In recent years, we have seen a number of initial public offerings (IPO) being introduced to the market and many young or new investors have started to show interest, eager to get a share of the pie. However, many are doing so without conducting due diligence and the necessary research to understand the company they are buying into. You would have heard the saying “buy the rumour, sell the news”. We saw it play out with the controversial GameStop and AMC Entertainment Holdings scenario in the US. In both instances, investors bypassed the due diligence step of assessing the stock’s value, to ascertain if the price you are paying for the stock is overvalued, undervalued or at the full value.
This is why becoming a serious investor requires a mindset shift. Your investment horizon should be long term with a focus on building a portfolio over a period by making incremental purchases, which will reward you over the long term. While there are opportunities you can capitalise on for a short-term return, you stand the risk of losing a significant amount if the price goes against you. The stock market is a home for volatility. Once you know and accept this, you should not lose sleep if a stock you bought fell 10 per cent the following day. Understand and embrace volatility; use volatility to your advantage – buy low, sell high. When people are fleeing the stock market, this is prime opportunity for you to take out your shopping list and strategically start buying.
In building your portfolio you want to ensure that it is diversified, which means you should invest in sectors that compete with each other. When a sector is falling or going south, the opposing sector is appreciating or going north; an example of this is at the onset of the pandemic, travel and airline companies were some of those stocks that plummeted because of the economic fallout due to the virus. However, technology sectors rallied because the demand for virtual connection increased for work, schools, and entertainment.
Additionally, you need to remain in an investment zone, consistently primed to take advantage of prospects during the pandemic; as even in a crisis there can be opportunities.
As there continues to be fallout in the economy, it is advisable to align your investment strategy towards purchasing or increasing your holdings in defensive stocks. These are companies that offer products and services that are essential such as food, health care and utilities. When the economy rebounds, you can then increase your allocation in cyclical stocks; companies in industries such as travel, luxury items and clothing benefit when the economy is growing.
Another mindset shift to embrace is that you do not want to get attached to stocks. If it is time to sell, based on the outlook of the company, you need to sell and reallocate the proceeds.
Finally, the secret weapon to investment is to start early in order to benefit from the compounding effect.
History has shown that equities over the long term have outperformed other investments, particularly fixed income. Your focus as an investor should be to increase your knowledge about the market and understand how these companies make money and how that impacts the stock price. Speak to your broker for guidance. Don’t fear the unknown. As your knowledge base increases, your fear will fade.
Denise Marshall-Miller is the manager, bond trading, equity and stockbroking, Victoria Mutual Wealth Management Limited. She has worked for over 15 years in the investments industry in the areas of trading, portfolio management and business development.
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