Editor’s note: This article was first published in September 2011, during the euro debt crisis. Its recommendations, gold figures, deposit offers and the 4.81% bond yield refer to that moment and should not be read as current advice. Banco Espírito Santo collapsed in 2014.
As we can see, share prices are “on the floor”, which may tempt some people to take positions in the stock market. Before you invest in the stock market, drawn in by these low prices, we recommend bearing a few factors in mind.
For investors who are already sitting on losses in their portfolio and facing the dilemma of whether to sell or hold, the truth is that it’s too late to sell now: selling at a loss won’t achieve much. This is the time to look at the dividends of the companies where our money is invested and, above all, to assess whether a stock is close to its “rebound” zone (see the ball investment system). We should also keep an eye on a few factors that practically nobody can “guess”, such as ruling out a recession in the short to medium term, or the end of the downtrend.
Holding on to our portfolio, even with losses, and taking new positions can be a good idea. Of course, buying for the sake of buying won’t do much good if we can’t be sure which way the market is heading. In the stock market, as at sea, when the waves are rough we need to take far more precautions and, above all, avoid going into the water when the red flag is flying. That said, we can get rid of some of the penny stocks in our portfolio.
For those who are out of the market, perhaps one of the best pieces of advice we can give is to stay on the sidelines until we see how stocks perform over the course of this week, since the market closed with losses again this Monday. Much more volatility is expected, and although volatility isn’t usually bad for earning an extra return, the moment you buy in is clearly key.
See also: What Spain should and shouldn’t do to get out of the crisis
Investing in gold
As for investing in gold as a safe haven, today we honestly don’t know what to say. When gold hit $1,500 an ounce, many people asked us whether it would be a good medium-term investment. Obviously, at that price, we advised against investing in gold and, as is plain to see, WE GOT IT WRONG, because gold went on to reach $1,910 an ounce, an all-time high.
Logic tells us that gold can’t rise much further today and that a correction is far more likely than another rise. Even so, nobody knows any more where gold might head given how volatile the markets are, especially bearing in mind the old saying (very true at times) that when the stock market goes up, gold goes down, and when the stock market goes down, gold goes up.
Investing in fixed income
Regardless of what you do with equities, in periods of such volatility and uncertainty it’s entirely advisable to hold part of our portfolio in fixed income, though not just any fixed income.
We would advise investing in private rather than public fixed income, looking for “high-yield” deposits paying more than 4% with a maximum term of 24 months, or better still, 12 months. Some of the banks offering these returns are Banco Espírito Santo, Banco Gallego and Unicaja’s Fidelidad deposit (among others), all of them for new money. Right now short-term government debt yields less than these deposits, except for 3-year bonds (4.81%).
We also recommend using interest-bearing savings accounts, where online banks offer very good terms.
For the more adventurous investor: ETFs
We have already explained this investment vehicle; see what ETFs are and how ETFs differ from CDS. During this crisis they have been among the most profitable investments, but also among the riskiest. As with any stock, with this product we need to know how to choose the type and the fund manager.
To give you an idea of the returns on this product, Credit Suisse achieved a 30-day return of more than 190%, and Citigroup reached 101%. Many other managers have achieved returns above 70% in 30 days, although it’s also true that many more have had returns below -50%.
We still advise avoiding investment funds and taking a cautious approach to equities. Remember that being an investor doesn’t mean you have to be invested at all times. A good investor also stands out for knowing when to stay “on the sidelines” for a while.
Further reading
Featured image: Kernow Skies, CC BY-SA 3.0, via Wikimedia Commons.
