The coronavirus is turning the economy on its head, shifting a thriving market into a looming bear market, which happens when stocks decrease over a period of time.
A bear market will officially trigger if stocks drop 20% or more from its latest peak — an event that officially took place this week as the Dow and S&P 500 both weathered big dips.
If the market stays grizzly, you may see stock value and prices continue to drop — which can affect your portfolio and 401(k).
But when prices plummet, it’s best not to panic.
If you’re trying to get the most out of the market, it’s better to stand up to the bear and stay in it for the long haul, said Roger Ma, financial planner at lifelaidout and author of Work Your Money, Not Your Life.
“When you invest in the stock market, the average long-term annual return can be anywhere from 7% to 8%, but it wont feel like 7% each year,” Ma said. “It’s more like riding a rollercoaster rather than chilling on a lazy river.”
It’s typical for the market to react to global news, like President Donald Trump’s election and the novel coronavirus. The last bear market was a result of the financial crisis in 2008 and stocks did recover, putting the economy in an 11-year bull market — a period of time where stocks consistently rise.
“We’ve seen these swings before,” Ma said. “Things happen pretty quickly and we don’t always know what's going to happen .”
If you want to take action, your best bet is diversifying. You can achieve short- and long- term financial goals with a mixed portfolio of stocks (read: high-risk investments) and bond mutual funds (lower-risk investments), Ma said.
“The exact portion of one's portfolio that should be in stocks and bonds will depend on each person's goals, their time horizon, and their risk tolerance,” he explained. “There are numerous investments available to investors, but for many, it's most effective to use a simple strategy.”
Before shifting your portfolio around, Ma suggested a quick self check-in. Ask yourself: What are your long- and short-term financial goals? What are you investing for and when do you want to achieve those goals? That way you can evaluate your tolerance to risk and reallocate your assets accordingly.
“Make sure what you’re investing in aligns with what you’re investing for, and the timetable for each of those goals,” Ma said.
Let’s say you want to save for an emergency fund, buying a home and retirement. Your shorter-term goals can be achieved by reviewing your budget and increasing your savings contributions using a high-yield savings account.
For your longer-term goals, like retirement, it’s important to be realistic on how much you want to put away and the type of savings plan you need, Ma said For example, if you’re more than a decade away from retirement, you can likely take on more risk than if you’re a few years away from tapping into your nest egg.
Dedicating time to your financial future can help you stay calm about the day-to-day moves in the market and external events — like the coronavirus, Ma added.
“While it's impossible to protect your portfolio from temporary downward swings in values, you can protect your portfolio from yourself — and potentially doing something rash, like selling and locking in losses.”
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