I don’t remember any event more prominent than the COVID-19 pandemic in our generation that brought almost the entire world to a standstill. While it continues to endanger millions of lives, the damage to the global economy has also been enormous.
But, as they say, rough times are great teachers, and this black swan event has also given the investment community some valuable pearls of wisdom.
COVID-19 market crash: Did the world really end?
My father, a retired, conservative investor, advised me to sell everything in mid-March this year. Certainly, the panic was dominating then as the novel coronavirus was raging on. Global financial markets were tumbling daily with huge losses with no end in sight. But did the world really come to an end?
On the contrary, stock markets soon recovered. As major economies re-open and the pandemic curve is nearing to flatten-out, all major stock indexes have recovered almost entirely from what they lost during the COVID-19 crash. The TSX Index has recovered almost 40% in the last two months.
Warren Buffett’s address some 30 years ago is more fitting today. The legendary investor cautioned about super-contagious diseases for investors—fear and greed. Thus, he recommends “to be fearful when others are greedy and to be greedy only when others are fearful.”
Those who did not panic and stayed invested or rather put in fresh money during the crash are certainly sitting on handsome gains right now.
Exposure to both defensive and aggressive stocks
Diversification plays a bigger role, particularly during market crashes. Some high-quality names like Air Canada are still reeling under pressure, and it will unlikely ease anytime soon. Air Canada stock was one of the top performers in the last decade, but it might take years to recover to its early 2020 levels.
At the same time, the top utility stock Fortis (TSX:FTS)(NYSE:FTS) has almost recovered to its pre-COVID-19 crash levels. It stresses that utility stocks, though seem boring, can be highly valuable during the market downturns. Fortis has been paying dividends for decades, and the stock has notably outperformed the TSX Index in all these years.
Dividend stocks like Fortis are useful to create a passive income stream that can cover you through your sunset years.
Many individuals have lost their jobs, and the CERB is their only option for living through these rough periods. A well-diversified portfolio of dividend stocks like Fortis will surely go a long way in such cases.
Tech stocks may not be the riskiest of all
The COVID-19 market crash has broken many long-established opinions. The tech sector is generally perceived as one of the riskiest sections of the broader markets. However, almost all tech stocks have shown remarkable resilience to the pandemic.
Shopify is a great example. Shares of the e-commerce giant more than doubled this year, making it the TSX’s biggest company.
The recent economic downturn has once again highlighted the need to have enough cash at hand. Markets can be highly uncertain. Thus, it would be prudent to hold cash for emergencies that would last for three to six months. Depending on the crisis and the individual situations, the amount of emergency funding can be adjusted.
Investors should note that stock markets work in cycles, just like economies. Rallies will be followed by crashes and those will be followed by rallies again.
While it’s impossible to tell when the next disaster will come, there will undoubtedly be such situations in the future. What investors can do now for sure is to better prepare for the next crisis.
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