Macroeconomy

Why invest in stocks in 2020?

Reasons to invest in stocks in 2020 despite the current environment

Under normal circumstances, I would answer this question by saying that stocks have provided the highest returns historically. It is much higher than inflation over time. Therefore, we can say that despite its volatility, it is the best place to put your money in the long-term. And this is true also in 2020. However, the historical situation that we are living now has a much more powerful answer: The unprecedented amount of money printed this year. Please have a look at the image to have a better understanding of the situation:

Source:Katusha Research

As you can see, more than 20% of the total (all history) dollars have been created in 2020. Extending the example to the rest of the world, this money is printed by the central banks and they buy bonds from the governments. It allows governments to emit debt at very low-interest rates to support the jobs and provide subsidies to the population.

What are the consequences of central banks printing such amount of money?

It means that there is a huge amount of “new” money in the world. ECB and FED (Central banks in Europe and the United States) are buying government bonds (to give the money to the governments) and as a consequence, they are eliminating any type of country risk, so the interest rates are zero or even below to zero (in Europe). I gave the example of Europe and the United States, but it is happening in England, Japan and all the countries with a powerful enough central banks (mainly developed world)

Consequently, bonds are not an attractive investment because of its low yield. There is excess liquidity in the equity markets and it keeps stock prices up (Value needs a different chapter 😛 ). Moreover, as you can imagine, adding such amount of money to the system creates inflation.

What are the alternatives if I don’t want to invest in the stock market?

Bonds are the most common investment alternative. Nevertheless, because of the huge size of the repurchase programme of central banks, yields are so low that this investment is not attractive. 

The other alternative is maintaining the money in cash (bank account or similar). However, this is also a bad option because of inflation. If 21% of the total US dollars have been printed in 2020, as soon as the economy starts to work again (velocity of money) we are going to foresight important inflation. If we maintain our money in cash, its value will erode considerably in the coming years.

What can you do if you don’t want to buy stocks, but you don’t want to diminish your purchasing power?

First of all, we would recommend you become more familiar with the idea of investing, at the end of the day, you are working hard to have money, you should understand what to do with this money. The best way to do this is by reading some books related to this topic. I will post a section related to this soon, maybe it helps.

Second, we would advise you to consider the idea of investing in ETFs (funds that replicate an index and have low fees), as it is the cheapest and best way to start investing. There is an entire universe of ETFs and maybe you should spend some time thinking about the ones that are more convenient for yourself. I will also post the list of ETFs I am using soon.

Overall, the last decision about investing in one place or in other is up to each one. There is a huge amount of differences among the situation of people, including the age, which conditions the decision significantly. However, the main takeaway is to realise the economic situation we are going through and how the decision of central banks are affecting common people.

We will also publish a post to explain the reasons to invest in the rest of the assets we have in the portfolio

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