Why Investing In The Financial Market Right Now Comes With Both Heightened Risks And Opportunities

Dollars&Sense 2020-04-17

This article was written in collaboration with Tiger Brokers.

The year 2020 has not been a good year thus far. As of 15 April, there have been more than 2 million known cases of COVID-19 around the world claiming the lives of more than 126,000. Unfortunately, these cases continue to increase each day, and nobody knows when this global pandemic will end, or how many more lives it will take.

The world as we once knew is no longer the same, at least not in the short-term. International travel has come to an abrupt halt. Millions, or perhaps even billions, of people, are either working from home now or out of a job. In the U.S., it’s estimated that the unemployment rate could climb to as high as 20% in April.

The financial markets, both locally and globally, have taken on a beating not seen since the 2008 Global Financial Crisis. The Straits Times Index (STI) is down by about 20% since the start of the year, while the S&P 500 is down about 12% over the same period. Many investors have seen their hard-earned investment gains over the past few years wiped out in a matter of weeks.

The question for Singapore investors today is: where do we go from here? Do we continue investing, or should we take a break for now?

With Danger Comes Opportunity

Investing in a crisis is never easy, but it’s also worth remembering that with danger comes opportunity. During a bull market, investors’ sentiments are positive, and everyone is investing, so it might be difficult to find good investment opportunities since prices of stocks are usually high.

However, during a bear market where investors are exiting the market, or choosing to hold on to cash, investors willing to take on short-term price volatility can find good, robust companies that are now trading at a discount compared to the price they were previously trading at during a bull market.

Taking a little risk during this period to capitalise on the bear market may be dangerous but if you are able to take the risk, you may enjoy a higher return in the long run.

If you want to invest during this period, you should be aware of the risks and take the necessary precautions to mitigate the risks.

Don’t Put All Your Eggs In One Basket

The COVID-19 pandemic is a timely reminder that it is essential for investors today to hold a well-diversified global portfolio.

If we only invest in stocks from one country (e.g. only invest in SGX stock counters), our investment portfolio may be affected when a black swan event impacts the country.

By diversifying your investments in a group of global MNCs, investors can mitigate their exposure and maximise the returns in the long run.

Trade With Caution

Investors aiming for short-term gains will be tempted to capitalise on the price fluctuations in the markets to make a quick buck. Certain market sectors such as pharmaceuticals or tele-communications are trending higher amidst the current situation. Savvy traders can try to buy at a lower price and make some quick profits when the opportunities arise.

Whilst this strategy may be applicable in the Singapore stock market, based on trading volume, SGX is dwarfed by its U.S. counterparts. Higher volatilities in the U.S. markets magnify the risks and rewards to the traders when they trade in this period of uncertainty.

The increase in risks and rewards should not be taken lightly. As prices move rapidly in a volatile market, traders are exposed to the risk of losing large capital in a short period of time. For investors aiming to make quick profits, they must first identify the risks in it and be prepared to trade in periods of high volatilities.

Not All Businesses May Survive

As countries continue their fight to contain the COVID-19 outbreak, both big and small businesses are affected. Some companies, particularly those in the aviation, tourism and hospitality sector, will continue to be adversely impacted. Other businesses without strong cash flow or a recession-proof business model will suffer.

The reality is not all businesses are going to survive. As an investor, you want to protect your capital and avoid punting during this period of uncertainty. Whilst fortune (sometimes) favours the bold, you should not take unnecessary risks.

If you are new to investing, try to gain global exposure by investing in ETFs that track on broad indices or select strong companies that have a global footprint.

Investing Overseas Through Tiger Brokers

Whether you are investing for the long-term or looking for investment opportunities in the current volatile markets, Tiger Brokers is your one-stop trading partner to help you attain your financial goals.

Licensed by the Monetary Authority of Singapore, Tiger Brokers offers one of the lowest fees for trading overseas stocks to help you capitalise on international equities and other financial products. It’s real-time, comprehensive trading tools ensure that you stay on top of your portfolios anywhere, at any time. You can also gain access to real-time, in-depth financial information on stocks listed at your fingertips via its all-in-one mobile trading platform.

As markets become uncertain and volatile, overseas investment opportunities come with a fair share of challenges. However, with a good understanding of the risks involved and managing your investment portfolio through diversification can help traders navigate and overcome these speedbumps.

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