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Keep calm and carry on
Short-term stock market losses, even as big as they are now, will balance out in the long term
Don’t withdraw money from your investments unless you need it now; if you do need liquid cash, consider a high-yield savings account
Stock prices are low and now is a great time to invest more — even if just $10 — because money will be worth more when prices rise again
It’s understandable to worry about your investments when the news is constantly talking about how much the coronavirus has caused the stock market to drop. However, it’s important for investors not to react emotionally and pull everything out of the stock market. The best advice right now is not to panic and to stay the course.
The stock market always fluctuates in the short term, which can include big gains and big losses. But the market will even out over the long term and you will still get solid gains from your investments. This is especially true for young investors who may not need the money from their investments for decades.
The main reason you might consider withdrawing money from your investment portfolios right now is if you need the money in a more liquid form. Many workers have lost either pay or their jobs because of this coronavirus pandemic, so they may benefit from having readily available cash for paying bills and covering necessary expenses. To better understand how much cash you should have, try this simple budget sheet.
You may also want to reassess your investing strategy at this time. Make sure you have a balanced asset allocation with diversified investments. If you need help, consider reaching out to a financial advisor. They will be able to advise you on which investments to choose based on your age and your investing goals.
The novel coronavirus (officially named COVID-19) has greatly disrupted the U.S. and global economy. As a result, the stock market has seen big losses. For example, the S&P 500 and the Dow Jones Industrial Average both saw their largest single-day (percentage) drops since the stock market crash of 1987. Stock markets have also become more volatile, with a day of big gains regularly followed by a day of big losses, or vice versa.
Stock markets are likely to continue struggling for months, or until it’s clear when the spread of the coronavirus will actually end. Some economists are predicting that the U.S. will experience a recession, with so many sectors of the economy grinding to a halt and with the sudden decrease in both consumer spending and confidence.
First of all, take a deep breath. One of the worst things most people can do right now is panic because of their short-term losses and either pull everything out of the stock market or make wholesale changes to their investment portfolios.
The two simplest pieces of investing advice right now are don’t panic about short-term losses, and stick to your plan, because it will still help you meet your goals over the long-term in most cases.
It’s difficult to give specific advice beyond that because everyone’s financial situation and investing goals are a bit different. However, here are four things that are important to remember, based on our previous conversation with CFPs in Policygenius Magazine:
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The stock market will always fluctuate and sometimes this means losses in the short-term. This is true even if you invest in relatively stable and predictable investments like bonds. But the stock market will gain over the long-term, so it’s important to take a long view with your investments.
“Markets are constantly fluctuating so it's important to stick to your plan regardless of short-term volatility or what news outlets are reporting,” said Patrick Hanzel, a Certified Financial Planner and advanced planning specialist at Policygenius, in a chat about investing during the coronavirus pandemic earlier this month. (Read Hanzel’s full comments here.)
This advice is especially useful for young people. For example, a 30-year-old who is saving for retirement in a 401(k) or IRA won’t actually need that money for 30 years or more. So the best thing they can do is leave it alone. Even if your retirement is just 15 years away, short-term losses right now are likely to even out before you need that money.
Learn more about what type retirement of retirement account is right for you.
At the same time, you may still want to re-evaluate your investing strategy at this time to ensure you’re well-positioned for success when the stock market rebounds after the coronavirus pandemic. Older individuals and those who are planning to withdraw their money in the near future should especially focus on their asset allocations and on diversifying their portfolios.
To mitigate your losses during a stock market downturn, advisors have long advocated that investors should keep a diversified portfolio. This simply means that you shouldn’t put all of your eggs in one basket.
Investing all your money in one company could mean you lose everything if that company underperforms. In the case of the COVID-19 coronavirus, many companies in the retail, travel, and shipping industries have seen heavy losses, while losses for digital streaming and virtual conferencing companies haven’t been as significant.
Consider investing in an index fund or exchange-traded fund (ETF) instead of an individual company. These funds allow you to invest a small amount in dozens or hundreds of individual companies, which cushions the blow when a single company or industry struggles. It well also minimize your losses when most or all of the economy struggles, as is the case with the COVID-19 pandemic.
Your asset allocation should also reflect your age and future goals. If you’re nearing retirement or just need to use your money in the next 10 years or so, you should usually keep a larger proportion of your money in lower-risk investments, like bonds or money market accounts. A 55-year-old, for example, won’t have as much time to recover from stock market losses as someone who is 35. Since it’s difficult to know how long any individual downturn will last, it’s best to lower your risk as you near your goals.
Riskier stocks and funds offer the potential of big gains, but they also have the potential for big losses. It can be good to put some of your money in these high-potential investments, but not all your money. Bonds and other lower-risk investments won’t provide the same rate of return as some stocks, but they still offer better returns than a savings account in the long run.
It generally isn’t advisable to sell all your investments and withdraw all of your money when the stock market declines. If you invested at any time in the past five years, withdrawing investments right now would almost certainly mean you lost money. (The silver lining is that you may save on your taxes next year because of capital losses.)
There’s an important exception: keep enough cash to cover your day-to-day expenses.
Large stock market declines may come with other economic effects. This is especially true with the current coronavirus situation. The stock market is going down in large part because the U.S. economy has basically shut down. Many workers have lost their jobs or are losing income from reduced hours.
If you think you are at risk of losing your job because of the coronavirus, make sure you have enough money on hand to cover important bills and expenses. Individuals without other sufficient savings may need to consider selling investments in order to have cash. Another path to consider is temporarily lowering your contributions to retirement accounts so that you have some extra money in your paychecks.
(Disability insurance may also cover you if you get sick and can’t work because of a medical quarantine.)
Even if you move money from investments into a savings account, consider a high-yield savings account. These have higher interest rates than standard bank accounts and instead of earning interest at a rate of 0.01%, you may be able to get a rate of 1.50% or more. However, keep in mind that many banks and credit unions are lowering even their savings account rates in response to market conditions caused by the coronavirus outbreak.
Try our savings calculator to see how your savings will grow.
Unfortunately, many workers will lose their jobs or incomes during the coronavirus pandemic. Here are two considerations you can take right now to protect yourself and your family financially.
Create a spending plan. Look at your spending to understand what’s essential and what isn’t. A budget, like the 50/30/20 budget, will help you know where you can cut back if that’s necessary. It’s important to also include your contributions to savings and retirement accounts.
Consider life insurance. If your spouse or family relies on you to pay part of the bills, they will probably have a hard time in the unfortunate situation that you pass away. Life insurance may sound like an unnecessary expense since the mortality rate from COVID-19 is low in the U.S., but it will offer your family financial protection should something unexpected happen to you. Learn more about how life insurance covers coronavirus.
“Sometimes we need to look at the glass half-full, as market downturns can provide a great opportunity to invest some additional cash,” as Hanzel explained to Policygenius Magazine.
If you have any additional money that you can invest, even if it’s only $10, consider investing it while the stock market is down. The reason is simple: buy low and sell high.
Your current investments may lose money when the stock market goes down, but that also means the share prices for those investments are down. You will get more shares for the same amount of money if the share price is low, and you will earn more in the long-term when those shares each grow in value again.
For example, say you paid $150 to buy one share of an ETF in February. If the price went down to $120 in March, you might feel like you lost money. But if you had $240 that you could invest, you would be able to afford two additional shares in March. If prices later rise back to $150, you would own $450 worth of shares that you only paid $390 for.
About the author
Derek is a tax expert at Policygenius in New York City. He has written about multiple personal finance topics in the past, and his work has been covered by Yahoo Finance, MSN, Business Insider and CNBC.
Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.
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