How to Invest During a Crisis

The recent political and humanitarian turmoil in Ukraine has sent the international community reeling. Many thought that it would be unthinkable that two democratic neighbours would find themselves engaged in traditional warfare in the 21st century.

News that Russia had moved troops into Ukraine as part of a broader offensive sent shockwaves across worldwide financial markets on 24 February 2022. In the UK, the FTSE 100 index of companies fell by 3.9% over the trading day, wiping £ billions off the value of blue-chip listed companies on the London Stock Exchange

This immediately led to headlines about the financial impact of this market shock. These losses came after falls already seen earlier in the year when confidence in tech stocks waned.

This guide to investing during a crisis will explain several actionable steps that you can follow to take your day trading or value investing skills to the next level during a crisis.

  1. Find reliable financial news sources
  2. Understand the characteristics of distressed markets
  3. Keep tabs on the macro-economic picture
  4. Prioritise liquidity over price
  5. Draw confidence from stock market history
  6. Keep a clear head – invest for ‘beyond the crisis’
  7. Choose a broker unaffected by current (or future) sanctions

Learning how to invest during a crisis is a multi-disciplinary skill. This guide will cover a mixture of academic finance topics, some behavioural psychology and will conclude with more practical tips on how to avoid making mistakes while under pressure.

This guide is not financial advice. Click here to learn more about the differences. 

Investing during a crisis

1. Find multiple reliable financial news sources

As we explain in our introductory guide to day trading, the quality of your trades will be capped by the quality of your information to hand. 

In a rapidly-developing political situation or a warfare scenario, you need to find a reliable source of credible journalism.

While it can be helpful to browse Twitter to get some colour and live reports, you’re gambling on the veracity of the information you may find. When news headlines are appearing minute-to-minute, it can be easy to rush into a trade based upon unverified sources (or even fake news) in the hope of ‘beating the market’. 

Our list of the best financial news sources is a great starting point for building your own portfolio of trusted sources. For live reporting, larger neutral media organisations with a clearly independent editorial policy such as the BBC is useful. The BBC has in place many mechanisms to ensure independence, and even regularly airs criticisms and complaints about the wider service on Radio 4. 

Media organisations are comprised of humans, and therefore no outlet can be error-free. Our advice is to use organisations with high levels of transparency and a long history of good quality journalism. 

In the UK these include The Guardian, Times, Telegraph, Independent, BBC, Sky News, Reuters & The Financial Times.

2. Understand the characteristics of distressed markets

If you Google ‘distressed debt’ or ‘distressed equity’, you will likely hit the web pages of the UK’s best hedge funds that specialise in these high-risk and obscure asset classes. 

That’s because these are complicated markets that reward detailed analysis, financial modelling and calculated risk-taking. 

When equity markets enter a bear market, it could be said that the entire asset class has become a distressed market. At this stage, investors may barely recognise the market they had previously thrived within. 

In a bear market, the share price of even respected and growing companies can suffer dramatic cuts within a matter of hours. Price movements may appear to ‘decouple’ from reality, and movements may only make sense after hours of painstaking research and hindsight. 

Here’s an overview of the characteristics of distressed assets: 

  • Polarised investor views on outcomes (doomsday versus everything will be ok)
  • Extreme price-sensitivity to live news and events
  • Even investors who make the correct long-term call may bear high losses in the short term
  • Low liquidity (more on this later)

These characteristics make for a volatile ride even if you make the perfect call. The immediate consequence is that trading with leverage during a crisis is not advised. You can make the correct call and still be wiped out if you use high leverage, as asset prices can diverge from their ‘underlying value’ in an extreme fashion while panic ripples through the markets.

3. Keep tabs on the macro-economic picture

When managing an investment portfolio, it can be natural to focus on the specific outlook of your equity investments. 

“How will this crisis impact the demand for a companies products?”

“Will this crisis plunge my investee into a loss-making position?”

However, the micro view should be held in equal weighting to the macroeconomic picture. 

As the best economics books will explain, crisis and other shocks will result in changes to foreign exchange rates, economic growth, wage levels, employment and interest rates.

When these broader metrics begin to shift, this leads to a secondary wave of consequences for all firms in an economy. Even if a firm was not directly linked to a geographic region or sector in crisis, it can be swept up by a macroeconomic tide which may favour or hurt all firms in a country. 

4. Prioritise liquidity over price

The existence of an active market that will enable you to buy or sell your assets immediately is known as liquidity. 

The more liquid a marketplace is, the quicker you’ll be able to find a counterparty willing to offer you a fair price for the other side of your trade. 

During calm periods in the economy, liquidity in stock and bond markets is typically very high, particularly in the developed economies and emerging markets

However, liquidity cannot be assumed when you are trading in the financial markets during a crisis. 

To combat this, you can move to use level 2 market data rather than level 1. Level 2 market data is usually offered by only a handful of the best UK stockbrokers and offers wider visibility over the size of active orders on the order book at different prices. This can reveal insights such as the revelation that a large buy order may potentially move the market owing to a lack of sell orders close to the market price. 

When investing using even the best crowdfunding platforms such as Funderbeam, or other platforms and exchanges such as peer to peer lending platforms, liquidity becomes a chief concern during a crisis. 

Many investment platforms offer secondary markets which provide some basic liquidity to otherwise illiquid investments. An example might be a property crowdfunding platform that allows members to sell their shares to other users on the platform where no official ‘redemption’ opportunity exists. 

However, while these are welcome innovations; investors commonly make the mistake of assuming such liquidity will be available if they want to sell their investments during a crisis. 

In reality, the liquidity of these secondary markets will dry up quickly during a downturn as new inflows onto the platform may cease. This results in very few buyers being willing to trade at any price. As a result, all sell orders sit on the order book unfulfilled. 

5. Draw confidence from stock market history

To act as a wise investor, you need to be a student of stock market history. 

This goes beyond the history of the London Stock Exchange or other institutions such as the FCA or The Bank of England

We suggest you research the periods of stock market mania such as Tulip Mania, the South Sea Bubble, the roaring ‘20s and more recently the Dot Com Bubble

It’s also useful to learn about other economic bubbles such as the California Gold Rush, the Texas Oil Boom and books about the rise of cryptocurrency to add more examples of exuberance and humility to your memory bank. 

Of course, while the majority of these historical accounts will cover the explosive growth in asset prices, the part to really pay attention to is the market crash that followed. 

Ultimately, all unsustainable euphoria in the financial markets is rewarded with a painful return to earth. It’s important to see these stories play out to build a clear image of what the boom and bust cycle looks like. 

While bubbles in specific assets can provide a tale of caution to investors, historical accounts actually empower stock market investors to keep their money in turbulent markets. 

That’s because the data shows that diversified stock market portfolios actually perform just fine after major crises. 

Take for example the 1941 attack on Pearl Habour, the Cuban Missle Crisis (1962) or the September 11th attacks on the World Trade Center in 2001. These three crises with widespread international impact did not universally lead to investor ruin. 

In fact, the S&P 500 index of US companies was actually higher after 6 months and 12 months for two out of three of these scenarios. That’s right – if you had invested after these catastrophic events, your portfolio would have sat in the black more often than in the red one year on. 

6. Keep a clear head invest for ‘beyond the crisis’

It’s worth bearing in mind that our lives will be peppered by good and bad news. Regimes will rise and fall, economies will boom and bust, regions will move through cycles of war and peace.

This isn’t a barrier to investment, it’s the definition of investment. When you stake your wealth behind the best companies or best funds to invest in, you’re making a bet that your investment will be able to withstand all of the chaos and emerge stronger out of the other side. 

Losing money in the short term is a necessary but highly likely part of every investor’s journey. The moment you stop trying to ‘avoid all losses’ is a moment of progress in your investment maturity. 

All of the excellent stock market returns you’ve learned about are the returns stock market indices have produced in spite of crises, not absent of them.

The question you should ask before investing during a crisis is not whether a company is likely to survive, or bounce back strongly (as this information will already likely be reflected in the price), but rather whether this is a company that you want to invest in for ten years or even more. 

7. Choose a broker unaffected by current (or future) sanctions

The recent Ukraine crisis, in particular, has brought a new consideration to the table when choosing the best UK stockbroker; sanctions. 

After severe geopolitical events, the UK and European legislative bodies have leveed sanctions against Russian-owned financial institutions. 

Sanctions such as these will typically restrict these organisations from transferring money to other financial institutions and will sometimes force other institutions (who act as custodians of the assets managed by the sanctioned firm) to freeze assets. 

This can render an investment held by a private individual as completely inaccessible. 

How can you avoid such sanctions? It’s quite simple – choose the large UK-based stockbrokers which are fully regulated by the FCA. Such firms are unlikely to be directly caught up in an international crisis that would result in the UK regulator imposing sanctions upon it.

How to invest during a crisis – a summary

Investing during a crisis isn’t a strategic or special act. Any long-term investor who holds shares for a decade or more will inevitably hold their shares through several crises which light up the headlines.

Successful crisis investors don’t hold their nerve through willpower alone. Their confidence is founded in the data and history of many investors before them.

As retail investors, all you can do is ensure you’re acting upon the right data, looking at the bigger picture and remaining optimistic about the long term success of your investment portfolio.