I am fully aware that talking about investing right now might sound crazy. Amid the coronavirus crises and uncertainty ahead, it seems like it is not the right moment. Well, let me tell you something: it is the perfect moment.
The way you should perceive investment or savings has to do more with the things you want to have in the future, sacrificing a small portion of the present well-being. I know that sometimes saving or investing may sound like a secondary thing, especially when you are in your 20s and 30s. Trust me, I have been there. As mentioned in our previous blog “Building a Budget During the Coronavirus Emergency”, the first and most important thing to start saving/investing is understanding your finances.
I know how frustrating and exhausting it seems, but once you track all your expenses for two or three months and see where the money is going, you might start thinking in a budget, for example limiting yourself in the money you spend in restaurants. Although there is not a specific rule for the amount of money that you should save/invest, I once read you should save 20% of your income. This number will only make sense once you have tracked your expenses, debt obligations, etc. At that moment you will know if you can make it 15% or 30%. The most important part here is that you commit yourself to this saving every time you get your salary and treat it like if it is a fixed expense! Try to use a separate account where you can put your savings, so you don't feel tempted to use this extra money.
Once you have started this process, you will start thinking about investing in the future. Let me give you some perspective about recent market fluctuations:
One month ago (March 23) the SPX reached the lowest point since 2016, losing almost 30% from the closing level by the end of 2019. As of today, it has gained 28% again. One true and big claim here is that we don’t even know if we reached the lowest point of this crisis. So, the following question would be… why the stock market has recovered almost 30%? There are several reasons:
First, we have Investors Appetite: It has been almost 4 years where we have been hearing reading that a recession in the US was imminent. During this period we also found analysts and experts saying how expensive the stock market was, implying that there was some kind of bubble. Having huge gains from the Bull market of the last 10, many investors were positioned with cash for the downturn. Now that we are in this downturn, nobody wants to lose the next rally.
For some historical context: The fall in the financial market back in 2007 took almost 1.3 years, where it reached the lowest point in March 2009. By that moment the market had already lost 53.7%. It took the S&P 500 more than 5 years to reach the levels before the crisis, meaning gains of more than 100%. From this point to the close of 2019, the gain is almost 120%. All this means that if you invested USD 1,000 at the lowest point in 2009 you would have had USD 4,720 by the end of 2019. Not bad at all, right?
Secondly, rapid response. I am not referring to the Government response to prevent the coronavirus around the globe. Instead, I am talking about the central banks and governments actions to cope with the crisis. Unlike the financial crisis in 2008, this time the consumer confidence was hit harder with the sharpest decrease in history. As of now, we only have speculations on how the economy is going. As soon as the economic activity indicators are published, we will have more volatility. With more negative data expected from all indicators in the following weeks, more measures will be needed too.
One last reason would be accessibility. Today, you have access to an enormous amount of information, whether you decide to start the journey on learning about the stocks that you pick yourself or even to compare options that can lead you to a portfolio that you will feel comfortable with.
In other words, evidence and history (not only compared to the financial crisis back in 2008) showed us that we must be positive as markets are only going up; yes, with volatility and some uncertain times in the middle but every time higher and higher. Downturns in the stock market are the perfect time to buy without the feeling that stocks are expensive. Remember to maintain a long-term perspective, as you are investing in companies and time is needed for them to grow.
In the next blog, I will be discussing how to invest your money once you know your profile. To learn more about our work at Spartan Capital Intelligence, subscribe to our newsletter.