Different generations of investors have their own experiences, where crucial lessons are learned. For older investors, it could have been Black Monday, the dot-com bubble, or the 2008 global financial crisis.
For the younger ones, the recent worldwide health crisis may have been the most critical event in their investing career. There are many valuable investment lessons you can pick up from the events of the last 12 months, and here are seven of them.
- Staying Invested is Better than Cashing Out
The year 2020 and 2021 has proven that buying and holding quality investments for as long as possible is the way to go, especially during a major crisis. That means sticking with the company during tough times in the short term while keeping your focus on its long-term potential.
The urge to cash out becomes stronger during periods of market volatility. Instead of taking out your money, you should learn to ride out the market’s ups and downs. By withdrawing, you might be setting yourself up for a loss in the long term, which could cost you gains once the market bounces back.
If you sold your investments at the bottom of the latest bear market, you’re turning a profit at S&P 500 levels recorded five years ago. But then, you have a hard time deciding when to return to the market, which may have resulted in some missed recovery opportunities.
- Staying Calm is Key
Staying calm is vital, even when the market is underperforming due to a major health crisis. If you try to manage your investments steadily and reasonably, you have a better chance of staying profitable during challenging market situations.
The early days of the pandemic prompted many investors to panic sell and opted for cash. However, the move only led them to secure losses, and they failed to take advantage of a gain of almost 100% since March 2021.
- Don’t Wait for the Best Time to Invest
Procrastination can be a major issue with investors, as it impacts their ability to make timely decisions regarding investments and risks.
It is always a good time to invest. Try not to wait for the market to stabilize and start climbing consistently again before making a move. You could miss out on some potentially excellent opportunities if you chose to bet on the markets at a later date.
Remember, every minute counts, and any delay could cost you in the long run. Therefore, you need to avoid taking such an investing approach. The sooner you put your money to work, the more you’re likely to benefit in the long term.
- Bet on Tech Stocks
Another lesson that investors picked up in the past 12 months: the tech industry is a source of support, and they would be wise to bet on tech stocks.
During the pandemic, tech companies showed better performances than others, with the tech-heavy Nasdaq 100 index beating the S&P 500 index by around 30 percentage points.
While it may already seem too late to invest in one, that may not be the case, as there still appears to be a chance to turn a reasonable profit in the tech sector.
In addition, if you’re looking to take advantage of any broad economic rebound without betting on individual stocks, you can opt for index or exchange-traded funds (ETFs) that follow the performance of the overall economy or a certain industry, such as tech.
- It’s Easier to Process a Brief, Huge Decline than a Slow One
While the sharp bear market in the previous year turned out to be severe, it only lasted for a short time, which may have kept investors from overreacting.
That means the rapid sell-off in 2020 could have been a good thing. Investors are usually more on edge when they see the market is falling for an extended period than when it is going down fast.
- Always Keep a Diversified Portfolio
Last year’s and this year’s market events also reiterated the importance of having a diversified portfolio.
Investors should always remember to allocate their investment money in assets beyond traditional 401(k) or IRAs, which can include individual stocks, mutual funds, bonds, ETFs, commodities, or cryptocurrencies.
By investing across multiple asset classes, you reduce the risk of one poor investment. Moreover, with investment liquidity, you can flexibly spread your capital to protect your portfolio and seize opportunities once they appear.
- Emergency Funds are a Must
Emergency funds are a must, regardless of the situation. After all, nobody can accurately tell what’s around the corner. Therefore, you need to prepare for the worst. As the saying goes, “save like a pessimist, invest like an optimist.”
That way, you’re ready to deal with difficult financial situations in the short term and when you need monetary support later in life. Moreover, having accounts for your short-term goals means your longer-term goals, like retirement, can stay safe and will keep on growing.
A study showed that stock buying this year was up by 50% to 90%, with people in the lower-income level showing higher surges.
While trading volume increased, many, particularly the savers, still focused on adding to their emergency funds. Many of those who received their stimulus checks also decided to invest them.
Is Now an Ideal Time to Buy Stocks?
It all depends on which stocks you want to buy. The future of some companies appears optimistic, but that does not apply to all businesses. Therefore, it is still important to practice due diligence on every company you invest in. The financial reports will give you an idea of the company’s financial health.
Furthermore, keep in mind that context is everything. While some investments can be expensive, that does not make them unattractive. On the other hand, some investments which seem cheap now could actually be the expensive ones and may disappear in the next few years.
The Bottom Line
Overall, you should consider and learn from the recent events that impacted nearly every aspect of people’s financial lives. Doing something to create a solid financial plan to survive future emergencies should be your goal.
By being on top of your finances, you’re placing yourself in a more solid position where you can tackle uncertainties properly and appreciate the good times.