Headlines about the coronavirus might be depressing to look at. But keeping an eye on the news is essential for investors who are trying to figure out how this unusual situation might impact their investment portfolios.
The potential consequences of the worldwide coronavirus epidemic quickly influenced market sentiment. Investors feared the worst for COVID-19’s impact on economies and businesses, and so global markets quickly tumbled in March, including index funds.
Index funds are often appealing to novice investors who want to invest in established markets while diversifying their portfolios, as index funds mirror the performance of underlying markets. These funds haven’t been impacted in the same way by the coronavirus, as they generally cover different asset classes, sectors, and geographical distribution.
With stocks trading lower as investors seek to protect themselves, some sectors were strongly hit, while others have in fact over-performed. For instance, index funds dedicated to the health market have proved more resilient than funds dedicated to the travel and leisure sectors.
How to choose what to invest in
One of the most important questions to answer before starting to invest in the markets is “what to invest in”. To answer, you need to consider the state of global economic conditions.
Every economy faces successive periods of expansion and contraction that will hurt or support the performance of particular sectors. In general, there are 4 stages in an economic and market cycle, those being expansion, peak, contraction, and trough.
These phases have a different influence on the level of employment, public and private consumption expenditure, inflation, and the overall level of growth. And these changes are what create the most interesting investment opportunities, depending on the sector activity you are targeting.
Therefore, it is essential to research what phase of the business cycle a given economy is in, as considering the relationship between economic cycles, business cycles and market cycles can give you an advantage over other investors.
For now, it is difficult to see how any given company stock might perform, as there is so much uncertainty about when normal economic activity might resume, not to mention the support packages put in place by banks and governments.
Should you rebalance your portfolio now?
Trading during these challenging times isn’t easy for investors, especially newbies, as they face strong volatility and potentially strong losses. Finding the correct answer to the question ‘what should I do with my portfolio’ is complex, as there are many ways to think about this situation.
One thing is certain: you need to take into consideration your financial goals, your trading plan and take advantage of potential buying opportunities, like companies that will benefit from people staying at home, or those who will likely bounce back once lockdown measures are over.
‘Markets are always unpredictable, but that goes double for a situation as rare as a pandemic. What you do know are your goals and your plan. If those haven’t changed, then stay on course’ explains the director of manager research for Morningstar, Russel Kinnel.