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3 Myths About Market Trading During the Coronavirus

The economic upheaval of the COVID-19 pandemic has encouraged some misconceptions about the markets.

No one would blame you if you admitted that this was a confusing time to invest. The effort to contain the spread of COVID-19 has created some ongoing financial, economic, and social consequences that were unimaginable just a few weeks ago.

The most notable of these consequences is the unpredictability of the market — or rather, that it is even more unpredictable than ever. March 2020 has already seen some of the most dramatic changes in stock market history. On March 16, the Dow Jones Industrial Average had the second-largest daily percentage loss of all time. Yet on March 24, the Dow had its best day since 1933.

The disorienting nature of the market has generated plenty of advice. While some of the discussion may be useful, some of it may be misleading. Here are the most common myths about trading during the coronavirus incident, as well as some recommendations on what to do instead.

1. MYTH: THOSE WHO TRY TO CATCH A FALLING KNIFE ONLY GET HURT

“Never catch a falling knife” is a popular Wall Street adage that warns traders against the risk of buying a discounted stock too early. The “falling knife” is the term for a sudden drop in the price of a stock, and “catching” it means buying it at its lowest point and holding as the value rises.

In some cases, buying into a falling market is dangerous because knowing when it hits its minimum is nearly impossible. However, COVID-19’s shutdown of many businesses is an unusual outside influence. Is a market considered a “falling knife” because of the quality of the economy, or is it likely to gain momentum after governments lift quarantine mandates?

Consider the fundamentals of companies, including the quality of the management and the integrity of the business plan. If it seems like they will have an effective strategy once the global “social distancing” is over, then they may be strong enough to survive in the current climate.

2. MYTH: EQUITIES ARE YOUR ONLY OPTION

If the falling knife seems too risky for you, there are more options than just selecting the right stocks. Allocating more of your portfolio in other asset classes can provide some diversity and mitigate your risk anxiety.

In response to the coronavirus phenomenon, policymakers have severely cut interest rates in an effort to limit a possible recession. This may mean more opportunity for other investments, such as bonds, exchange-traded funds, gold, and other advantageous investments.

3. MYTH: THIS IS A PERMANENT CHANGE

No one is denying the nature of these financial, economic, and social changes is unique. However, despite the unprecedented era of the coronavirus, this isn’t the first situation when extreme external factors have affected the markets. Disease, war, and other sociopolitical crises have inspired big swings in the markets.

Still, history shows that the markets can and will bounce back. For example, the S&P 500 Index performed significantly better just one month after 9/11, the Cuban Missile Crisis, and the collapse of Lehman Brothers. While we can’t anticipate exactly when the markets will recover, their improvement and durability are inevitable, much like the strength of our country.

As tempting as it may be to sell now, maintaining your investments during crises — or even investing more into the eye of the storm to take advantage of market valuations — can help keep your portfolio on track.

Don’t panic. This too shall pass.

Best regards,

Tony Huck
Chief Executive Officer, Score Priority
Toll-Free + 1-855-274-4934
Domestic + 1-646-58-3232
info@scorepriority.com

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