By Dr Yii Kwang Jing
Stock market speculators may be worried about a crash in the stock market during the COVID-19 pandemic where share values may fall. As a result, they may consider selling their shares to avoid any greater losses from their investments. However, there are risks involved in any stock investment as no one can foresee what lies ahead in the stock market, particularly during the current pandemic with potential ongoing lockdowns. Due to the continuously changing outlook, investors should expect a rough ride while waiting for the anticipated V-shaped recovery. The stock market offers the best possibility to grow wealth, as the interest rates for savings are substandard.
Many people are still wondering if they should buy shares at this point in time. Investors are seeking to know the ‘true colours’ of shares. Investors own a part of a company if they buy its shares. They are rewarded by increases in the company’s share price and regular payments made to shareholders from the company, namely, share dividends. However, shares can provide either high returns or significant losses, should the shares perform poorly. Therefore, shares are best suited to investors who can cope with significant volatility in the value of their investment over the short term while striking for higher returns in the long term.
Investors should take extra care when considering trading in shares during the current pandemic. First, investors should not panic or be influenced by negative news which may induce them to sell shares and hold cash instead. Rather than selling, investors should consider the potential for recovery, as the shares have already been purchased. Continued uncertainty surrounding the COVID-19 pandemic has allegedly intensified ongoing stock market volatility; thus, investors who remain in the market may benefit from long-run returns. Second is diversification, which is the primary technique for cost-effective risk reduction. It can be achieved by owning shares across various industries, countries and risk profiles, as well as other investment types such as bonds and real estate.
Third, investors should select shares prudently. One proven technique is to search for companies with strong balance sheets and business models that are not sensitive to the economic cycle. This technique will secure dividends that will be distributed to investors. Investors could also consider companies that possess the potential for structural shifts in the long term such as technology and energy. Fourth, investors could search for high-quality companies whose shares have been unduly and negatively influenced by the pandemic. They could take advantage by buying the undervalued stocks of such companies, which should again flourish in the expected economic bounce back.
If stock market investments are not their priority during the current pandemic, investors could consider other investments available in the financial marketplace such as cash and fixed interest investments, unit trust funds and property. Cash and fixed interest investments such as bank savings accounts and fixed deposits are considered to possess minimal risk. However, they generally realise little income, and inflation may dissolve the value of such investments in the long term.
Meanwhile, unit trust funds are an ideal choice for individuals who are new to investment. They enable individuals to start investing with small amount of capital, easily add on to their investment and diversify their investment to minimise risk. The property sector is another popular investment area among Malaysians. Investors can benefit from ongoing increases in the value of their capital as property prices increase, as well as from rental income from tenants. Similar to share trading, property investors should consider a range of factors. Property investment is considered a long-term investment most suitable for investors who have no critical need to access funds from their investment.
In general, the rules for investing in stocks have not changed due to the COVID-19 pandemic. Investors can continue to choose to purchase shares in worthy companies and hold them to obtain long-run returns. Nevertheless, this might need persistence and risk tolerance from investors to draw out a long-term winning strategy.
Dr Yii Kwang Jing is a lecturer at Swinburne University of Technology Sarawak Campus. He can be reached via email at KYii@swinburne.edu.my.