Should You Abandon Index Funds During the Coronavirus?
When it comes to investing, you should be confident in the assets you’re purchasing. In recent years, a lot of investors have been turning to index funds instead of stocks or active mutual funds.
Index funds are collections of stocks or bonds designed to match the stock market’s performance rather than beat it. When the stock market is doing well, index fund investors will reap great rewards. However, when the stock market as a whole is tanking, index fund investors won’t be experiencing great payouts.
The appeal of index funds is clear: they are passive investments. As a holder, you don’t have to worry about moving your money around to make it work for you. The passive nature of an index fund takes all of the work off of your hands. They also tend to be low-cost so that you won’t be spending your life savings on hefty fees.
However, this passivity comes at a cost. In a poor economic environment, index funds don’t perform well. Their value can decline steeply in just a couple of days, even after years of steady growth.
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If you’re wondering how to invest during coronavirus, we’ve got you covered. Learn more about why you should avoid index funds during this time and put your money into individual stocks instead.
The Diversification that Can Put You at Risk
Jack Bogle was the man who first introduced the idea of index funds in 1975. He saw a way to give amateur investors a fair chance to compete with financial gurus. While his intentions were pure, index funds are not the way to go during all types of market conditions.
By their nature, index funds offer diversification. They expose you to the market as a whole. When you buy an index fund, you own a tiny part of every company in the fund. This diversification minimizes your risk and allows you to grow your profile during economic upturns.
However, in the world’s current economic state, index funds are not what you want to be buying.
In late February of this year, the U.S. stock market experienced historic lows. The Dow Jones dropped more than 10% in a single week, and the rest of the world’s stock markets also experienced trouble. If you bought index funds during this time, you know those stocks were not able to outperform these poor economic conditions.
Instead, you should consider buying individual stocks. It’s no secret that some companies are performing better than others. For example, a lot of airlines and restaurants are losing money due to a lack of business. On the other hand, supermarkets and certain online retailers are thriving due to increased demand.
Do your investment portfolio a favor during coronavirus by building it with handpicked stocks.
Buying Stocks During the Coronavirus
Financial experts often frown upon picking stocks. They say it is irresponsible or reckless. Some even go as far as to equate it to a more sophisticated form of gambling. After all, how can you possibly know which individual companies will outcompete others?
However, investing in individual stocks during a recession is an excellent way to stay ahead of the game. You’ll have a better chance of beating the market, especially given its current unfavorable conditions. Instead of settling into the market’s downward turn, you have the opportunity to come out on top.
However, not every individual stock will give you the gains you’re seeking. You’ll need to set aside some time to research thoroughly. This way, you can make informed decisions that will contribute to your long-term financial future.
Select Dividend-Paying Stocks
So what’s our advice for how to invest during coronavirus? Although we can’t tell you which stocks are right for you, we can steer you in the right direction. When it comes to picking stocks, consider buying ones that pay out dividends.
Dividend-paying stocks can help you grow a predictable and sustainable income stream. You can use this consistent stream to cover some of your expenses now or fund your investing goals in the future.
You want to select stocks that pay out dividends historically. Some companies will increase their dividends every year to keep up with inflation, which is especially beneficial to investors looking to build a reliable income stream. When it comes to buying stocks, try to choose companies known for being well-managed and generally immune to the downs of economic cycles.
Some financial experts will argue that index funds often pay dividends, too. While this point is true in some cases, these dividends are usually pretty low. Plus, the payment amounts are often inconsistent.
Save on Expenses
During this time, you may be unemployed or not receiving your regular flow of income. In any case, you should be looking to save as much money as possible. You can do this by purchasing individual stocks.
Depending on your specific approach, you can save a lot of money on fees by investing in individual stocks. If you use a low-cost broker, you can expect to pay a meager one-time fee no matter how many shares you buy. Once you own the stock, it’s yours to keep for no extra costs. Just make sure you pay any pertinent taxes that you owe on your dividends until you sell your shares.
Index funds come with a recurring annual fee, known as an expense ratio. Even though index funds are infamously “low-cost,” these fees can still add up. While new investors won’t feel the impact of index fund fees as much, you should still keep them in mind. Every dollar you can save during an event like the coronavirus will help you meet your financial goals in the long run.
Pick the Companies You Like & Trust
When picking individual shares, stick with the companies that you like and trust. Even with the world in an unpredictable state during COVID-19, you can still stick to your guns when supporting certain businesses.
For example, if you regularly shop at Target and believe in its long-term success, buy stocks in it instead of a competing store that you don’t like. Investing in stocks is an excellent way to stay loyal to certain brands and stay true to your values.
Also, try to avoid companies whose practices you don’t support. By sticking to this mindset, no matter the current economic environment, you can be a conscientious investor.
Strive to Beat the Market
During coronavirus shutdowns, some companies will be more successful than others. If you put your money into diverse industries through an index fund, you risk losing out on significant profits.
Through some research, you should be able to determine the best individual shares to purchase during COVID-19. Find companies that have a reliable track record for paying their investors. You should also select companies that:
- Operate primarily remotely
- Don’t require face-to-face contact to make profits
- Offer essential food or healthcare products or services
The Arguments Against Individual Shares: Debunked
In this section, we’ll explore some of the common arguments against buying individual shares. We’ll also outline why these don’t apply during global events like the coronavirus outbreak:
“Picking Individual Shares Takes a Lot of Time and Research”
The U.S. Department of Labor reported that more than 25 million Americans lost their jobs as of April 23rd. If you are one of these people or have otherwise experienced a reduced workload, you likely have a lot of time on your hands. Take advantage of your newfound free time to educate yourself on the best stocks to buy based on your unique situation.
“There Are a Lot of Risks When It Comes to Picking Out Stocks”
Right now, the whole market’s performance is nowhere near its best. At the start of 2020, it would’ve been nearly impossible to beat the market due to its record high performance. However, the coronavirus has since humbled the stock market, so why not try to beat it now?
The risk that comes with buying individual shares is negligible now. Buying “safe” index funds is a passive decision that won’t let you experience significant financial gains in the current environment.
A lot of investors shy away from purchasing new assets amidst economic crises. You may find it intimidating to invest during a period of such uncertainty. Especially if you’re young or new to investing, your investing strategy has likely never felt the impact of such a big change before. However, you should invest as much as you can. You want to be proactive and smart about how to invest during coronavirus. If you don’t actively work to protect your investments, you’ll be kicking yourself in the future for not taking action now.
Even if you’re eager to start picking stocks, don’t be quick to rush into making purchases–research individual stocks before buying. Consider if you want to invest in one or two stocks or buy multiple different ones with various companies. No matter your financial goals, individual stocks can help you meet them even during a pandemic.
Bio: Chris Muller
Chris Muller is a financial writer and digital marketer – he started a digital marketing business in 2015 that focuses on freelance writing, content marketing, and SEO – all while working full-time and playing dad to two kids.
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