A beginner’s guide to investing in shares during the COVID-19 pandemic
Wednesday 20 May 2020
Share investing isn't for everyone, even under normal circumstances. Amid the economic impacts of COVID-19 however, a little extra care is required.
The market’s recent ups and downs have even hit bigger organisations, the types you'd expect to be buffered from economic downturns. For example, the Commonwealth Bank (CBA) and National Australia Bank (NAB) share prices were down significantly by the end of April, compared to their February highs. These types of falls will spook any would-be investor.
Then there's the speculative aspect of the sharemarket that can dominate media headlines. For example, a number of companies saw a sudden spike in share price earlier this month, as if fuelled by the public’s new optimism for eased social restrictions.
Among the quick risers on the Australian Securities Exchange (ASX) were firms like Flight Centre (FLT), Webjet (WEB), News Corp (NWS) and Myer (MYR), all of which were struggling just weeks ago. Consider Flight Centre for a moment: the company actually stood down 6,000 staff members in March, closed shop fronts and its share price plummeted by 70% between February and April.
And yet, during the week of May 5 - 11, it was the fifth most traded Australian share on the CommSec platform, with most of the action coming from buyers, not sellers.
Share basics - keep it simple
Amid this swirl of activity, where should a novice investor start?
Chief investment analyst at Wealth Within, Dale Gillham says the market may seem daunting now, but it will settle down and we’ll eventually see another bull market come about, just as we'll see another bear market. In other words, this is not an arena for short-term thinking.
Gillham says that in volatile and unpredictable markets, the best strategy is to always invest for safety.
"I would rather get 1% for the next few months than lose 10% or more," he says. "If you lose 10%, your remaining capital will need to grow 11% to get back to even. Therefore, the best strategy is to not lose, especially when no one knows if and when the market has hit a bottom.”
This might sound simplistic but in share investing, sticking to the basics can take you far. One of those principles is to have a longer term view.
Gillham says there are two considerations that can help you profit over the long term: the first is only buy the top stocks such as the top 20 to top 50 shares in the Australian market. The second is to expect fluctuations. That is, some or all of the stocks in your portfolio may fall for a period of time before rising over the longer term. Good share investing is about having patience.
It’s also a good idea to read up on the share market and find out what your investment options are. Many Australian banks offer helpful pointers, such as this note on ANZ’s website: “A comfortable place to start may be industries and companies you have knowledge of. If you follow trends in retail, hospitality, emerging technologies or any other industry, use those existing insights to your advantage.”
At Mozo, we have some similarly handy guides, where we suggest that “if you don’t understand what a company does, chances are you won’t understand how it makes its money.”
These are good tips, no matter what the market is doing.
How about ETFs, I've heard they're good?
Experts often suggest Exchange Traded Funds (ETF) as a good way for beginners to diversify their investments, and in doing so, adopt a supposedly safer strategy.
According to the government's MoneySmart site, “most ETFs are passive investments that don't try to outperform the market. The role of the fund manager is to track the value of an index or a specific commodity. The value of the ETF goes up or down with the index or asset they're tracking.”
The idea is that it's best not to put all your eggs in one basket and ETFs allow investors to put investments in different baskets, so to speak. This helps protect your money, say, if one industry has a bad year. Or if a company fails, you lose only part of your investment, not your whole portfolio.
Gillham doesn't support the idea that investing in ETFs is a lower risk proposition, however.
“Individual fund managers run ETFs, so in reality you are buying shares in one ETF run by one company through one exchange,” he says. “What the ETF invests in is irrelevant in terms of diversification as the individual investor still only holds shares in one company and is therefore not diversifying risk.”
He says that if an investor chose to buy BHP or CBA, for example, they would still be buying a share in one company on one exchange. Both companies invest in multiple areas.
“Given this, I see no difference between owning an ETF and owning a share in a good liquid listed company,” he says.
Ultimately, investing in shares does require some financial flexibility, research and common sense. In times like these, it’s easy to be fooled by the quick wins reported across the media.
"While the COVID-19 crash has provided lower (share) prices, the market is quite volatile and unpredictable at present and this spells danger for new investors," Gillham says. "Therefore, it’s far better to sit back for a short period, let the dust settle, save your money, and then invest when the market is more certain."
Still interested? Consider these quick tips:
- Slow and steady wins the race - think long-term.
- Educate yourself on investing.
- Set a budget that allows for 10% to be put away.
- Choose a cost-effective share trading platform that suits you.
- Be consistent year in and year out.
You can also read our Share Trading 101 guide for more basics, info on risks and a jargon buster.