Investing in this stock market certainly has its challenges. For a start, there’s a very high level of uncertainty right now. No one knows for sure what impact the coronavirus will have on businesses in the near term. Secondly, volatility is extremely high. The stock market can be up 2% one day, and down 3% the next. This means that timing your investments well can be very hard.
If you’re wondering how to invest in this stock market, you’re not alone. Many investors are curious as to the best way to invest at present. My advice? Invest cautiously with a focus on risk, as well as reward. That way, you’ll profit if the market rises, but minimise the chances of big losses if market conditions deteriorate further. With that in mind, here are five things I’d do in this stock market.
How I’d invest in this stock market
My first tip, if you’re wondering how to invest in the current conditions, is to drip-feed money into the market at regular intervals. This will help you smooth out your entry points. It will also reduce the risk of losing a large amount of money if markets fall further. There’s nothing worse than investing a large lump sum and seeing it immediately fall in value by 10% or 20%.
It can also be a good idea to keep an eye on volatility levels. When volatility is at extreme levels (meaning panic levels are high), you may be presented with more attractive investment opportunities. When volatility surged in mid-March, for example, I picked up some shares in JD Sports Fashion for 320p. Today, those shares are trading near 500p, meaning I’m up over 50% in just over a month.
You can monitor volatility by checking the CBOE VIX index, which is often referred to as the ‘fear index.’ The higher the level of the index, the greater the level of investor fear.
Source: CBOE
Focus on high-quality businesses
In this stock market, I also think it’s sensible to invest predominantly in high-quality businesses. By this, I mean companies that have:
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Competitive advantages
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Strong balance sheets (i.e., low debt and plenty of cash)
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High levels of profitability
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An attractive growth story
Companies with these kinds of attributes tend to be more resilient in a downturn. This generally means less chance of big losses for investors.
Diversification is critical in this market
It’s also essential to diversify your portfolio properly. This doesn’t mean buying a handful of different FTSE 100 stocks. Instead, it means building a portfolio that has exposure to many different companies across different sectors and countries.
Don’t make the mistake that many British investors make and only invest in UK stocks. Having exposure to world-class international stocks such as Microsoft (up about 11% this year) and Apple (only down 3% this year) could potentially make a big difference to your returns in this stock market. One easy way to add international exposure is to invest in funds with a global focus.
Think long term
Finally, thinking long term is important in this market. We don’t know what’s going to happen tomorrow, or next week. Share prices could fall further. However, in the long run, it’s likely that the economy and the stock market will rebound. So patience is crucial as always.