With all of the headlines about COVID-19 and reports of companies struggling to manage the impact on their businesses, there has been a lot of talk about recession lately. It’s natural to feel worried about this – that’s what the headlines are designed to do. But before you go into hiding and liquidate all your investments, let’s go over the things you can do that you are less likely to regret in a few years, when all of this feels like ancient history.
First of all, realize that anytime we experience a global event, scare or crisis like this it is simple human nature to want to batten down the hatches. Remember swine flu? And our tendency, from our personal life and especially towards our investments, is to go into survival mode. Do you need to? That will depend on your situation.
What hasn’t changed
As employees come to my colleagues and I looking for thoughts and reassurance, know that our guidance as financial coaches hasn’t changed. If anything, today’s situation just reinforces the basics we always preach: maintain a healthy emergency fund in case of an unexpected disruption to your income and make sure your investments are set up according to your actual risk tolerance and not according to market conditions.
What you can do to feel more prepared
With all that being said, I realize that this is a unique situation with a lot of unusual uncertainty. Here are some things you can do to prepare for the spread of the virus and any negative market and economic impacts that may affect you. If anything, my hope is to bring some peace of mind, but these tips are also applicable in preparing for other more “common” disruptions such as a job loss or weather-related disaster.
1. Know what to do if you live in or are traveling to an area with an outbreak
The CDC (The Centers for Disease Control and Prevention) is regularly offering guidance to help all Americans. Study these guidelines and consider reviewing them with your family in order to help prepare and protect them from illness. We like to say we change lives at Financial Finesse, but these tips can actually save them.
2. Build an emergency kit and stock up on supplies
You don’t have to be a crazy survivalist living in a mountain cabin to see the value of an emergency kit with tools, first aid supplies, and enough food and water to last at least 3 days. In fact, that’s what’s officially recommended by FEMA at all times. A basic kit can be purchased for less than $100 from the American Red Cross or you can put one together for even less, especially if you already own many of the components.
The key with an outbreak like this is to make sure you have enough home supplies, medicine, and resources (ie water, non-perishable food, etc) on hand before you need it. The NY Times has also consolidated key expert guidance that recommends a 30-day supply of items for a situation like this.
3. Maintain an emergency cash reserve
In an emergency, cash is truly king. No matter how adequate your emergency supplies are, you never know what you may need to purchase from someone else after a disaster or how long you might need to cover expenses in the event of a loss of income. The rule of thumb is to 3 – 6 months of expenses in a savings account, but you should also have some actual cash on hand in your emergency kit.
The specific amount you decide is best for your family will depend on your personal comfort level, the availability of other sources of financial support, and how risky your income is. Regardless of the amount, make sure the money is easily accessible in a savings account or safely secured in your emergency kit.
4. Revisit your investment strategy
If you’re nearing retirement or any other goal that would require you to sell some investments anyway (aka you need to start spending your savings in the next 0-5 years, depending on your risk tolerance), then regardless of what experts are predicting, it’s probably a good idea to plan ahead for withdrawals. If you’re like me, with many years to go until you’ll need that money, just a quick reminder that investing is for the long haul, and in most cases, trying to time the market is a losing game. You may want to follow the advice of many investing experts and just stay the course.
The decisions you need to make if you decide to sell
If your time horizon is more than 10 years (meaning you could most likely ride this downturn out and still be better off in the long run than you were before) and you decide to sell anyway, you still have a couple of other decisions to make.
First, where are you going to put your money instead of the market? The alternatives don’t look all that appealing. With interest rates near record lows, cash isn’t paying much, and although bonds have rallied, they could lose a lot of value if and when interest rates start climbing back up. Gold prices have been rising dramatically but that could be just another bubble waiting to be popped.
Second, when will you get back into the market? If your answer is “never,” consider the effect of earning less than a 4% return on your retirement plans. Besides, do you really think the economy and the stock market will never recover once it finally takes a turn? Expert analysis has shown that in 85% of all declines of 5% or more, the S&P 500 got back to break even in an average of 4 months or fewer. Not guessing correctly on when to get back in is literally a killer for your long term investment growth.
If your answer is when things “settle down,” that’s usually code for when you feel the market is safe, and by the time the market has been going up for a while. By then, stock prices will already be much higher than they are now and you’ll have missed the opportunity to make up some or all of your recent losses. If you’re planning to time the market and invest at the bottom, good luck with that. Even MIT PhDs with supercomputers have been unable to do that with any consistency!
Alternatives to getting out altogether
Examine large holdings
So what can we do instead? Start by looking to reduce any stock holdings that exceed 10-15% of your overall portfolio value. This is called concentration risk. While the market is likely to recover from a downturn, no matter how good a company is it can go to zero and never come back. This is particularly important for company stock since your job and maybe your pension are already tied to your employer. The last thing you want to do is to lose them all at the same time.
Evaluate your risk tolerance and rebalance if needed
You can then take this risk tolerance questionnaire to make sure you have the right amount of your portfolio in stocks, bonds, and cash based on your time frame and comfort with risk. If your money is invested in a Target Date Fund or other asset allocation fund, then this will already be done for you. If you’ve created your own mix, it might be time to reallocate between stocks and bonds. Here are 4 ideas to rebalance your portfolio if you need some guidance there.
Tax loss harvesting
Finally, if you have losses in any taxable (aka non-retirement) accounts, a market downturn can be an opportunity to reduce your taxes through a strategy called tax loss harvesting. Simply sell any losing holdings that you don’t want to keep for the long-term, and at the end of the year you can write off up to $3,000 in losses against your income. Just beware of the wash sale rule – if you’re looking to sell something just for the loss, but you want to continue to hold the investment, you have to wait 30 days before purchasing the same thing again or the loss won’t count on your tax return.
Stay focused on the long term and your goals
Remember, the important thing is to stay diversified and focused on your long-term goals. When it comes to investing during a downturn, the answer is often not to do something. It is to just stand there (and maybe avoid checking your accounts too much). If anything, you might just get excited about the opportunity to buy investments “on sale” the next time you get paid and make a contribution to your 401(k) plan.
If you are struggling with where to start, or just need help in gathering your thoughts to develop your own game plan, don’t hesitate to reach out to an unbiased and trusted financial professional or a financial coach through your financial wellness benefit at work.
Hopefully, you’ll never need any of this. In the best case scenario, having a plan will simply provide some peace of mind!