We can all agree COVID-19 turned our worlds upside down. From being confined to our homes to many people losing their jobs, it has been a period of uncertainty for many of us.
When we aren’t sure about what’s ahead, it’s tempting to be cautious with our money and avoid risk in these uncertain times. But, the temptation to err on the side of caution and avoid risk can actually hinder rather than help your financial future. Flashback to the beginning of the pandemic when Canadians started stockpiling (remember the great toilet paper rush?). By the end of the year, the average household savings was about 15% – that’s higher than the previous seven years combined. And the result of those combined savings? As much as $100 billion, or about 6% of the country’s GDP!
So now the question is what should Canadians do with all that savings? It’s tempting to be careful, but as it turns out, if you have money, a crisis is actually a good time to invest.
A crisis is (almost) always followed by a rebound
In a crisis, our natural reaction is panic. Not to go too Freud, but we close ourselves off, avoid risk and seek security. It’s normal. But fear is rarely the best advisor.
With stock prices tied to major world events and the overall global economy, it’s not surprising that COVID-19 has had a huge impact on markets – for better or for worse, depending on the industry. But when it comes to investing, it’s the long-term that counts. So there’s no point panicking when prices dip or the media (yet again) predicts impending doom. When financial markets go down, it’s generally likely they’ll go back up again within months – or even weeks – especially since there’s often a post-crisis rebound to come. We can already see the markets bouncing back over the past year after the pandemic started. All it takes is a little patience.
That’s why it’s important to keep in mind that prices are just a snapshot of a specific moment in time. Like viral videos that fade into the digital abyss, stock prices tell us nothing about what will happen in the future.
To put it in a slightly more, well, historical perspective, past crises (like the 1929 stock market crash and the 2008 economic crisis) have almost always been followed by rebounds. Markets are cyclical; after falling, they rise. And the rise can be big. After the 2008 crisis, the American stock market bounced back by more than 320%!
That said, staying calm in a crisis is easier said than done, we know, so if your emotions do tend to overwhelm you, check out this article on behavioural finance and why investors are their own worst enemies.
Now’s the time to think about the future
If the pandemic has proven anything, it’s that we don’t know what’s going to happen (even though, on average, we can expect periods of positive growth to be longer and bigger than periods of negative growth). So safeguarding your future by putting money aside is important. But rather than just saving, it makes more sense (and cents) to invest.
Why? Because unlike savings, investing comes with opportunities for returns. Imagine that you put $100 in a savings account with a 1% interest rate. After a year, you’d have $101, but as prices rise with inflation, suddenly that $101 might actually buy less than your original $100 would have bought. Investing, on the other hand, gives you a potential return (aka “a gain”) that can cover the increase in prices. Yes, there’s always a chance you’ll lose money with investing, but in the long term, it very often means more profit, while savings can reduce your buying power.
Certain sectors are seeing an upswing
We all know that some industries have been hit harder than others, like the hospitality and cultural sectors. So while it might not be the best time to open a restaurant or launch a theatre company (though some people would disagree), some industries – like digital technology, health and sustainable development – haven’t just been spared, they’re on the rise. Meanwhile, Socially Responsible Investments (SRIs) have proven resistant and performed even better than traditional funds!
What’s the lesson? The economy isn’t all or nothing. When some sectors suffer, others will thrive, meaning a crisis can still be a great time to invest. The most important part of any investment is the purchase price – as prices go down, it’s an opportunity to buy low, with a long-term plan of taking advantage of the market rebounding, all while minimizing risk.
The investments you make during a crisis will work in your favour … as soon as the market recovers.