Stocks are on sale. That's good news for people who can afford to invest, but not everyone should be buying.
Whether you should buy depends upon your personal situation, not the price of shares you might want to buy. Think of it this way. It's Black Friday and a 70-inch television you want has dropped from $700 to $350. That's a 50% discount which makes buying seem like a good idea.
But maybe you have very little savings and uncertain job prospects. That makes buying an unessential item (you don't need a big TV) a bad idea. The same logic applies to stocks even if they have the potential to rise in value (which a big-screen TV does not offer).
Should you buy stocks? It's not an easy answer. Image source: Getty Images.
Know your finances
Before you invest in the stock market -- even one as enticing as it is now -- you need to fully understand your own finances. The first thing to consider during the coronavirus pandemic is whether you will keep your job throughout the crisis. Some fields, of course, have thrived during the current situation, while workers in other fields may find themselves furloughed or laid off.
After you consider whether money will keep coming in, you need to examine where you are now. Do you have a six-month emergency fund? Are you facing any added expenses due to coronavirus or something else? Have you paid off high-interest credit card debt?
If you check all of these boxes, then buying shares at depressed prices likely makes sense for you. Be honest when you examine your finances. Don't let a desire to profit from depressed stock prices lead to your buying stocks when you may need the money for more pressing uses.
Remember that nobody knows where the bottom is for the market. It's also impossible to predict when the market or any individual stock will recover. Historically, markets recover and good companies will come back, but that could take years.
Which stocks should you buy?
A number of very strong companies have seen their share prices fall -- sometimes by a lot. Before you buy anything, you should ask a number of questions:
- Does this company have the cash reserves/borrowing capacity to make it through the current crisis?
- Is the company in a business that will recover even if the economy enters a prolonged recession?
- How has management responded to changed conditions?
- Has coronavirus changed consumer behavior in a way that may become a long-term change?
Basically, you want to gauge a company's fiscal health and look at why its share price has declined. You also want to consider how quickly business will return to normal once the current social distancing efforts stop and life returns to normal.
Cruise lines, for example, have taken steps to borrow money and reduce capital expenses to be ready to go back to business once the pandemic passes. That industry, which I believe will eventually recover, will face a long road back.
Royal Caribbean, Carnival, and Norwegian Cruise Line will likely face diminished demand and depressed pricing when they return. Many consumers will have less disposable income, and some will be hesitant to be in an environment where people are packed closely together.
Eventually, though, I believe people will come back, but a return to normal may be a few quarters away or even longer. The same is true for all sorts of different areas where consumer spending is discretionary, not compelled.
Some companies will recover faster than others. But if you choose to buy, do so for the long term and because you fundamentally believe in the company's business. There are bargains to be had and gains to be made. But you should be careful: Only buy what you can truly afford, and be prepared to hold shares for a long time.
