Investments in Crises

June 18, 2020 Guest User

Written By: Milja Mieskolainen

The world is not following a steady path, but arriving at unexpected slowdowns. If possible, the market is also always expected, or deviates from the planned path. For many investors, especially those just starting out, changes of direction can be frightening. In general, one evaluates the performance of companies and considers whether they will survive a difficult situation. All companies and indices might not recover from the crisis to their “former glory”. On the other hand, the economy has gone up in recent decades, and the journey has even had room for downturns.

S&P 500 Index Sector Weights 1995-2017

In this and the next post, we’ll address the key highlights of crises and investing from slightly different angles. This post focuses more on the Overview, and we look at the lessons and responses from history. Next week we will go through concrete tips and ideas for long-term investing.

You often hear it said that you learn from your mistakes. However, “crises” for the whole economy can be very difficult to predict, especially without much effort. Therefore, a situation in which the chosen company does not happen to survive the crisis in perfect condition cannot be said to be a mistake in all situations. Sure, analysis and accurate information retrieval are useful in avoiding risks at the level of one company, but some situations are impossible to predict.

When an investor considers their company choices, decisions are often influenced by several personal reasons. Only about one in five Finns over the age of 25 invests directly in shares (Norvestia Investment Barometer, 2016). Of this fifth, only very few are professional investors, so on average the choices for the Finnish investment portfolio have not been made on the basis of in-depth analysis. And it doesn't have to be that way. Successful private investors have been described as systematic. This can mean, for example, that you do not make hasty decisions, but get to know the company in a way that suits your level and also stay on the map of the company's horizon during the investment horizon.

We have only talked about equity investing above, but it is good to keep in mind other possibilities as well. ETFs and index investing are a good addition to your portfolio. If your own interest is enough, you can also explore other possibilities. However, there are differences between individual companies and indices when a crisis situation hits the market. The company's fate largely depends on the industry and the combination of the current situation. The indices, in turn, follow the movements of the whole market quite faithfully, for example, or the movements of a selected sector in the middle of a crisis.

The indexes are built in a certain way. As a result, they do not necessarily accurately reflect the economic situation. For example, 26% of the companies in the S&P 500 index represent the technology sector and 3% the raw materials sector. As a result, changes in the technology sector affect about eight times as much as raw materials. The S&P 500 does respond to changes in the general market, but the emphasis may seem surprisingly much. So don’t be surprised if the index you choose isn’t in line with the current economic situation.

S&P 500 sector performance in 2020 (31.12.2019-25.2.2020)

In practice, when an investor buys an S&P 500 index, for example, he receives 500 shares of the company at a time. This implements a diversification for the investor, depending on the index, and for many, the indices are an integral part of the portfolio alongside equities. If, on the other hand, you choose to buy individual shares, you may have to buy several, even dozens, shares, depending on the strategy and other content in your portfolio. By investing in the index, you get an average market return that has been around 10% in recent decades. At the same time, however, it loses the opportunity to make overpayments.

Indeed, the selection of individual stocks provides an opportunity to obtain a better return than the market average. If you want to “dictate your own destiny” as an investor, choosing stocks may be the right strategy. It also involves a lot of data collection and reflection, but is also interesting and instructive in its own way. For example, if you want to start stock picking, you can start with about 10% stock weight in your portfolio and learn along the way.

Sample stocks from different sectors

In crisis situations, competence is weighed, and the success of portfolio assembly is successful. A person who has invested in an index may survive with small surface scratches or, alternatively, there may be even greater damage if he has invested in only one sector. An equity investor could reap huge returns if he has invested in companies that are successful in the crisis or loses his investment altogether. A well-diversified portfolio helps keep you asleep at night, so it’s good to rely on the basics even in crises and look at history. Crises have been revived, so you should keep your head cold and make only considered decisions.