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Investment Decisions at Times of Crisis

Investment Decisions at Times of Crisis

Investing at times of crisis – be it a natural disaster like a global pandemic, or an economic one, like a recession – is like walking on a tightrope. It requires a delicate balance of capital budgeting and prediction of future economic activity. 

Your constrained financial capacity, alongside growing economic concerns, determine whether an investment can pay off. Fortunately, there are strategies that we can employ to minimize the risk of investments made during dire times. 

What Do We Mean by ‘Investment Decisions’?

‘Investment decisions’ refers to the act of deploying funds in investment opportunities with an expectation of profit. It consists of purchasing capital assets, such as real estate and pieces of machinery for your business. It also refers to acts that diversify your investment portfolio. It includes making subsequent investments in the stock market or contracting financial instruments. 

There are many kinds of investment decisions. Some of its main categories will be discussed throughout this post. Nevertheless, the end-goal of making investment decisions remains the same: to maintain constant cash flow and turn in a profit. Whether you are a businessman or a stock investor, this may not be too easy to achieve when the economy is in a state of disarray. Here are some tips you can follow in your investment decision process: 11

Make Low-risk Investments Only

Evaluate your investment patterns, especially when the economy is suffering from turmoil. A crisis is not the time to make investments with high stakes. For instance, invest in stocks of corporations with low debt-to-equity ratios. Avoid speculative stocks at all costs. Likewise, equity investments must be made in sectors that are not adversely affected by the crisis. 

Additionally, some companies are desperate to stay liquid. Before investing, do not take a company’s records at face value. Do your research and determine whether a company’s fundamentals are stable. Uncertain times do not call for significant risks, so be sure to plan carefully before making subsequent investments. 

Understand Your Priorities

Always keep in mind your priorities. Some people have plenty of leeways to invest despite being in a crisis. A strong financial foothold allows some to invest with higher stakes. However, it’s a different story for small investors and entrepreneurs.

If your financial capacity is adversely affected by a crisis, it’s best to consider several things before making further investments. For example, always allot a portion of your finances for emergency expenses. Disasters can come in large scales, and it may leave you constrained for the foreseeable future. Thus, always set aside money for employment loss, health concerns, and other major setbacks. Having no savings to fall back on can spell trouble in the long run. 

Make Maintenance Decisions Only when Necessary

A ‘maintenance decision’ is a form of investment decision concerning capital assets, such as machinery and technologies. It seeks to maintain product and service upkeep so that demand may be satisfied. It takes into account the depreciation of these assets and determines whether repairs for these machines are required. 

Usually, maintenance decisions play an essential role in the day-to-day life of an enterprise. However, the frequency of making maintenance decisions at times of crisis must be tempered. Where the economy is suffering, the demand for products and services is in flux. 

Therefore, do not make maintenance decisions when production performance is not threatened. Postpone investments that increase production capacity when there is no correlative increase in demand. 

Instead, prioritize expenditures on additional statutory requirements imposed by government agencies. It may come in the form of other health protocols to be observed or supplementary reportorial demands; this is to avoid penalties that you may incur for non-compliance. 

Diversify Your Investments

Never put your eggs in one basket. A strategy employed by smart investors in diversifying their investment portfolio. It means branching out to other forms of investment. 

Spread your wealth across different sectors. Other than stocks and bonds, you can try out mutual funds and ETFs. There are plenty of financial instruments and schemes that you can enter too. 

Additionally, precious metals such as gold can hedge you from economic volatility. They are safe investment options that retain their value over time. Other secure options for investment include products with demand all year-round. You may invest in these products via the stock market or branch into the industry on your own. Some noteworthy examples include:

  • Essential goods such as food and beverages
  • Real estate
  • Other consumer staples such as alcoholic and tobacco products

Take Advantage of the Crisis

Market prediction plays a vital role in making investment decisions. A proper understanding of stock market trends can help you turn in a profit. 

For instance, many investors foresaw the sudden demand for online teleconferencing platforms during the Covid-19 pandemic. Zoom’s stock prices, a teleconferencing software, and an online chat platform reached soaring heights. Some investors were quick enough to put their buck in the company, which had a 169% revenue increase (totaling $328 million) for the first quarter of 2020. It defied the analyst’s expectations when the second-quarter revenue showed a whopping increase of 355%, totaling $663 million. As a result, analysts reported an adjusted earning per share of up to $0.45.

Though it doesn’t always have to be in the stock market, another example is investing in real estate. The Great Recession saw a significant drop in prices in the housing market. Thus, some were quick to invest in real estate by purchasing them while houses were below the regular prices. Many investors in the real estate market continue to reap the benefits today. It’s all thanks to a quick maneuver they did years ago. 

As such, plenty of investors have already turned in a profit because they were able to predict trends. As an investor, always keep your eyes peeled for the next big thing, even during a crisis.

Additionally, understanding the basics of supply and demand can help business owners branch out to other enterprises. Look at your existing products and closely-related industries. Ask yourself, 1.) what’s in, and 2.) what’s easy to branch. For entrepreneurs, this is referred to as “growth decisions”. It includes making complementary products or scaling up production to meet growing demand. However, while it is good to invest your wealth in other projects, it usually pays off only when it’s in a related industry. 

Don’t Make ‘Panic Investments’

When disaster hits, the market tends to overreact. Stocks have always been know as high-risk, high-reward investments. Many people attempt to cash in on the stock market when the price dips into affordable territory. This ‘buy-at-first-drop’ practice can easily backfire if the crisis persists. 

It is true that the stock market always finds a way to bounce back; this was the conclusion of a study that investigated the effect of global crises in the market. However, the question still hangs, when? Disaster can have far-reaching consequences, and the recovery process can take years. 

For instance, the COVID-19 pandemic: this has seen a slow resurgence in some countries, with a threat of a second (and even a third) wave. Thus, its prolonged economic effects can spell disaster for those who bought stocks and thought its price was the lowest possible. 

Therefore, always assess whether the disaster can lead to a long-term recession. Otherwise, stock prices may keep going down, and it may be awhile before you get your money’s worth. Suppose you can’t sustain yourself during the long recovery period. In that case, you’re better off investing somewhere else, or not investing at all. 

Final Word

As previously stated, economies will always find a way to bounce back. It is up to you to take the risk or play it safe during dire times. Aside from these tips, you can also hire experts so you can make an informed move. Don’t hesitate to consult a financial adviser if you don’t trust your gut.

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