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It has been an unusual period for the financial markets in the past couple of years. When the COVID-19 global pandemic first spread around the world in 2020, most countries closed their borders. The expectation then was that a global recession was looming and the financial markets would suffer as a result of that.
However, after the market took a hard tumble in March and April 2020, it went on a tear. From 3 January 2020 to 31 December 2021, the S&P 500 went up by about 47%, from 3234.85 to 4766.18.
And yet, now that the world is reopening and shifting away from a zero COVID-19 strategy to living with COVID-19, the start of this year saw a stark decline in most financial markets. From 31 December 2021 to 16 June 2022, the S&P 500 declined by around 23%. Other indexes such as the NASDAQ Composite (down 32% from 31 December 2021 to 16 June 2022) and the Dow Jones Industrial Average (down 17% from 31 December 2021 to 16 June 2022) also saw a similar decline. So, what exactly is happening?
One of the key catalysts for the current negative sentiments in the financial market is inflation. In May 2022, the consumer price index in the US hit 8.6% from a year before. To tackle inflation, the US Federal Reserve has recently raised its benchmark interest rates by 0.75%, the biggest increase since 1994, with many expecting this to continue for the rest of the year.
As consumers, inflation eats into our purchasing power and this means that our money is going to be worth less in the future unless we choose to do something about it today.
Invest In Profitable Companies
We can think of the stock market as companies that are broadly divided into two camps.
In one camp, we have established businesses that are still growing but more importantly, are profitable. This means that in most years, these companies generate a positive return for their investors either in the form of dividend payouts or retain earnings. Think of the likes of Coca-Cola, Nike, Apple and Amazon.
On the other camp, we have big, listed companies that are currently not profitable but are seen as high growth companies, allowing them to command a high valuation despite their lack of profits. You can think of companies such as Uber, Lyft, Peleton and Snap. These companies generate revenue but have yet to, or rarely announce a profit in their financial announcements.
While there is nothing specifically wrong with investing in high-growth, non-profitable companies, we need to recognise that growth companies are typically reliant on funds to grow, whether it’s pumping more money into marketing, investing in technologies or expanding into new markets. While these are important things that all high-growth companies need to execute, being in a high-interest rate environment where liquidity will be increasingly harder to secure, these growth companies may find it more challenging and expensive to continue growing.
Profitable companies are not spared from high interest rates either, since many such companies also have borrowings in the form of loans and bonds. However, they tend also to have greater resilience to withstand inflation and higher interest costs. For example, they may be pricing their products and services at a fair price and have customers who are willing to pay more for it. Such companies are also less reliant on debt to fund their growth and can afford to grow organically, through good and bad times. Often, most of these companies have weathered multiple recessions and have a track record of being able to offer stability to investors even during a recession.
By investing in the stocks of some of these companies, we can ensure that our money is put to good use and can grow in tandem with these profitable companies.
Not surprisingly, the most profitable listed companies in the world are mainly from the US such as Apple, Alphabet, Microsoft, JP Morgan and Berkshire Hathaway. Through a low-cost brokerage firm such as Moomoo Singapore, we can get access to the US market and look to trade stocks via their moomoo trading platform. With the moomoo app (available to download on Google Play for Android users and the App Store for Apple Users), we can trade on the go from anywhere we are using our mobile phone, as long as we have an internet connection.
Index-Based ETFs Are A Good Way To Start Investing
For those who are new to investing, or who are not comfortable or not keen to pick specific stocks to invest in, we can consider investing in index-based ETFs. Such ETFs can offer investors a simple and easy solution to get exposure to a wide variety of companies in different sectors via a single investment.
For example, by investing in the Vanguard S&P 500 ETF (VOO), we are automatically investing in companies that are on the S&P 500, which the ETF is tracking. These include more than 500 companies such as Apple, Microsoft, Amazon, Alphabet and Tesla.
As inflation and interest rates increase, these big companies are typically in prime positions not only to resist the additional costs, but possibly pass down their costs to businesses or consumers who are reliant on their products and services. Think of tech companies like Apple and Microsoft, and how they can continue to price their products profitably because their customers still continue to use their hardware and software, which are essential for everyday life.
When we invest in index-based ETFs, we don’t need to worry as much about having to analyse, choose and monitor specific companies.
Don’t Ignore Bonds In A High Interest Rate Environment
Instead of investing in the stock of a company, we can choose to lend the same company our money. This is known as bond investing. In bond investing, our returns typically come in the form of coupon payments which are paid by companies issuing the bonds.
The good thing about investing in bonds in a rising interest rate environment is that we can get higher coupon payments.
Similar to stocks, we can choose to invest in a bond ETF so that we don’t have to specifically choose which corporate bonds to invest in. One such bond ETF is the S&P 500® Investment Grade Corporate Bond Index. This is a bond ETF that seeks to measure the performance of U.S. corporate debt issued by constituents in the S&P 500 with an investment-grade rating.
A look at the current yield-to-maturity of the ETF shows that it’s 4.1%, as of 31 May 2022. While bond yields may not come across as exceptionally enticing, they do provide at least a return that can help cope or offset part of the inflation, ensuring that the purchasing power of our money can at least grow in line with the rate of inflation.
How Gold Can Protect Us
In the older days, gold is typically seen as a symbol of wealth and is sometimes used as a form of payment. These days, we don’t commonly use gold to show our wealth or to pay for products and services that we use. Still, gold is far from being an obsolete financial instrument.
One way that gold has reinvented itself is by becoming a reliable asset class for investors to turn to as a safe-haven asset during times of crisis and as a way to hedge against inflation. Whenever there is significant uncertainty in markets, including times of heightened inflation, people flock to gold as a means to store their wealth than letting it erode via fiat money (paper money).
We don’t need to buy physical gold and store them at home. Instead, one convenient way to get exposure to gold is to invest via a gold ETF such as the SPDR® Gold Shares, which is the largest physically-backed gold ETF in the world. This ETF can be found on multiple exchanges including the New York Stock Exchange (NYSE) in the US and the SGX in Singapore.
Besides Equities, We Can Also Invest In Bonds, Index-Based ETFs & Gold ETF On The Moomoo Platform
Stock markets like the New York Stock Exchange (NYSE) and the NASDAQ are no longer just financial exchanges that allow us to buy and sell equities (i.e. stocks). Today, these financial exchanges also allow us to trade other types of asset classes including bonds, gold and other commodities. And by investing in some of these assets, we can protect our money against the risk of inflation today.
For investors who wish to gain low-cost access to the US markets and other markets such as Singapore, China and Hong Kong, we can open a Moomoo SG universal account and start trading listed products on these financial exchanges via the moomoo trading platform.
You can read more on our step-by-step guide on our experience opening a FUTU SG securities account here.
Investing In Mutual Funds
Thus far, all we have shared above are assets listed on financial exchanges which we can consider investing in. While asset classes such as ETFs may not require as much management, they still require us to invest, monitor and rebalance our own portfolio regularly.
If we prefer to have a human fund manager investing and managing our portfolio on our behalf as we aim to grow our money to beat inflation, we can also consider investing in funds.
One convenient way to start investing in funds would be through the moomoo platform. Similar to how we can invest in listed securities, we can also find an extensive list of mutual funds that we can purchase via the moomoo platform. These include equity funds, bond funds, balanced funds and cash management funds.
At the end of the day, in the high-inflation world that we are living today, the best way to stay ahead of inflation is to invest the money we are setting aside for the future, so that we can get a return that will help us beat the rate of inflation.
Read Also: DollarsAndSense Experiences: How It’s Like Investing For The First Time In US Stocks (Via moomoo)
Disclaimer: All views expressed in the article are the independent opinions of DollarsAndSense.sg. Neither moomoo Singapore or its affiliates shall be liable for the content of the information provided. This advertisement has not been reviewed by the Monetary Authority of Singapore.
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