COVID-19 has put the world on lockdown, creating confusion everywhere. With the markets being so volatile, it has left investors perplexed as to the best course of action when garnering their biggest return per unit of risk. It is apparent that the two best strategies are not waiting around, and diversifying your portfolio of stocks.
In an ever-changing market, it is very tempting to simply stay away from the unknown; however, nothing new comes from being stagnant. As quoted by David Rae from Marketplace, “Investors bold enough to invest in stocks during the dark days of the Great Depression would have seen their stakes grow tenfold by 1957.” By choosing not to engage with the stock market you endure a large opportunity cost, as you forgo all the benefits you would have reaped by having taken part in the first place. This ideology is further exemplified by Rae who states “if we were to go back to 1930, and an investor missed the S&P 500’s ten best days in each decade, total returns would be just 91%, significantly below the 14,962% returns for investors who held steady through the downturns” (Rae 2020).
Though it is essential to engage with the market, one should diversify stock holdings to avoid risk. Jordan Farris, the Head of ETF Product Development at Nuveen states that “buying stocks across multiple sectors spreads the risk over many different positions, which allows a portfolio to do better over time. When one doesn’t put all their eggs in one basket, a portfolio doesn’t swing to the behavior of a sector completely.” Kelsey Renfro, Senior Strategic Product Manager at Northern Trust Asset Management agrees to “diversify on a security level, but to consider what stocks and sectors you’re investing in, and not to concentrate in an area that gives low returns.” Additionally, you can diversify by utilizing mutual funds, exchange-traded funds (ETFs), and indices, as they all provide diversification benefits and remove company-specific risk. When all is said and done, you should go engage with the market, while also creating a strategically managed, diverse portfolio.