The coronavirus crisis has decimated the world economy. As major economies have seized up, tens of millions of people have lost their jobs.
This has had a significant impact on the stock market. Companies are reporting rising losses, and many are struggling to raise enough money to keep the lights on.
In this environment, it’s no surprise that some investors are sitting on the sidelines. As the coronavirus crisis rumbles on, many want to keep their powder dry, to see how the world copes.
Coronavirus crisis market slump
But this could be a mistake. Research shows that the best time to invest in the market during a crisis is when everyone else is fleeing.
When it looks as if the crisis has started to abate, it’s generally too late to pick up any bargains.
Therefore, waiting on the sidelines, and trying to time the market while waiting for an end to the coronavirus crisis could be a waste of time. While it is impossible to predict what the future holds for the stock market, we do know that over the long run, the market has recovered from every significant setback.
Indeed, since its inception in the mid-1980s, the FTSE 100 has seen several major bear markets. On every occasion, the index has recovered. Although it has taken a couple of years, investors who bought the index at inception have seen nothing but a positive return over the past four decades.
It is highly likely we will see the same trend this time around.
That being said, as noted above, it’s impossible to tell what the market will do in the short term. As such, investors need to be prepared for further volatility.
Over the next few weeks and months, as the true scale of the coronavirus crisis becomes known, the market could drop a lot further. But it could also rise further. We don’t know.
The best strategy
As such, the best investment strategy for the current market seems to be ‘pound cost averaging’. With pound cost averaging, you invest a set sum in the market every month to spread out your investment over a long period.
This means that no matter what the market does over the next few months, you should be able to capitalise on any peaks or troughs, without wasting too much time watching your computer screen.
With pound cost averaging, you buy more stock when the market falls, and less when it rises. Doing so can significantly enhance your returns over the long run.
This isn’t a perfect strategy, but over the long run, this approach should achieve a steady positive return.
So, if you have money to invest today, it doesn’t make sense to wait for the coronavirus crisis to blow over. By the time it does, you could have missed your opportunity.
Instead, it might be best to set up a regular investment plan and let the market do the hard work for you.
