There’s a lot going on at the moment, with COVID-19 continuing to create lots of uncertainty. When will it be over? Will it be over at all? What will it do to the global economy? What will it do to the way businesses operate—and will those changes be permanent?
At the same time, there’s the response to COVID-19. For example, interest rates are historically low, so any money in your bank account makes barely any returns. And those low interest rates are driving the prices of things like shares and property through the roof.
Like we said—lots of uncertainty! So you may be wondering if you should start investing (if you haven’t already), or if you should continue to invest (if you’ve already started).
Our view: as always, it depends. Let’s get into the details.
Your personal situation
The most important thing to think about is whether it’s a good time for you to invest. What are your goals? What are your financial responsibilities? Do you have an emergency fund?
For example, if you’re going to need your money soon, it may not be the best idea to invest all your spare money into long-term, high-risk growth investments that will go up and down in the short term.
This is something you should think about regardless of what’s happening in the global economy. After all, a booming global economy is not going to be of much help if your car breaks down and you don’t have an emergency fund. At the same time, if you can ride the ups and downs for 10 years or more, then it’s probably worth investing for the long term.
You should also think about your personal strategy and plan. What’s your risk tolerance like? Are you confident that you’ll be able to hold on for a long time? And why are you investing in the first place?
The answers to these questions will help you figure out if you should be investing for the long or short term.
Your time horizon
Over time, investments tend to gain and lose value. There are dips and peaks. This is important when it comes to your time horizon—how long you expect to have your money invested for.
If you have a short time horizon, it’s very hard to time the market to make sure you buy in a dip and sell in a peak. For example, lots of share markets around the world are at record highs right now. Does this mean they’ll be higher in six months? Or lower? Or about the same?
We don’t know, because we don’t have a crystal ball.
But what we do know is that over the long term—like 15 years, 20 years or more—a well diversified portfolio does tend to increase in value. New technology emerges, making businesses more productive, and more people join the global population of workers, consumers, and business owners.
If your time horizon is long, you don’t have to worry about whether it’s a good time to invest right now. In the scheme of things, day-to-day or year-to-year fluctuations get smoothed out by the overall trend.
Are you diversified?
The pandemic and its response have had different effects on different investments. Some companies have benefited from the pandemic (like companies that make working from home easier, or provide online delivery). And other companies have been negatively impacted by the pandemic (such as airlines, and companies involved with tourism).
If you wind the clock back to mid-2019, you would’ve had no way of knowing that some companies would do so well while others would do so poorly.
This is why diversification is so important. A basket of investments gives you the opportunity to benefit from the upward trend of the entire market, rather than staking everything on one or two companies. A well-diversified portfolio means you don’t have to agonise over whether it’s a good time to invest or not, because the top performers balance out the poor performers over time.
You can also diversify the time you invest through dollar-cost averaging. This is when you invest the same amount, on a regular basis. This helps to insulate you from short-term peaks and dips in an investment’s price—you might pay a little bit more when it’s high, and a bit less when it’s low. These two things balance each other out, just like different investments in a diversified portfolio balance each other out.
Wrapping up 🎁
If you’re thinking about whether it’s a good time to invest or not, it’s important to give more thought to your personal situation than you give to anything happening in the global economy. Then, you should make decisions that line up with your personal situation. Make sure you’re diversified, understand your risk in relation to your time horizon, and make investment decisions that work for you.
Ok, now for the legal bit
Investing involves risk. You aren’t guaranteed to make money, and you might lose the money you start with. We don’t provide personalised advice or recommendations. Any information we provide is general only and current at the time written.