It’s hard to recall a time when market volatility has been as intense as it has been during the coronavirus pandemic. Over the course of March, federal, state and local governments imposed shutdown orders aimed at halting the spread of the virus, while in the process shutting down nearly a third of the U.S. economy. That shutdown battered the stock market too. But shortly after the passage of the CARES Act on March 27, stocks rallied.
In volatile times like these, it takes a strong stomach to jump into or stay in the market. If you want professional help, talk to a financial advisor today.
Think Twice Before Selling Your Investments
The stock market has taken its biggest hit since 2008. Even bonds have taken a hit. It is widely acknowledged we’re already in a recession. During a recession it’s common to instinctively bail on the market. Many retail investors want to get their money out of assets that seem vulnerable to a free fall, which might make perfect sense from an emotional point of view.
But the market’s volatility will ease and economic fundamentals will once again dictate the market’s direction.
Unless you need your money in the immediate future or believe you have invested in industries unlikely to recover, for most investors it may be the wisest choice to keep your money right where it is. That’s especially true if selling right now will only mean converting hypothetical losses into real, actual cash. If you wait and let the market recover, you can regain that value. Indeed, those investors who stayed put while the bottom was falling out of the market have already seen significant recovery in their savings.
During the Great Recession it took the stock market two years to recover. There’s no good way to tell how long the post-quarantine recovery will take, or what dips it might experience along the way, but one thing is certain: Right now, selling out of fear or impatience could be a very good way to lose money.
Consider Buying During This Time
Many investors are focused on liquidity right now. For anyone worried about losing their job, which should be almost everyone, the last thing they want is to invest money they later need for rent.
That is a very legitimate concern, and it’s important to balance your need for cash today against your need for cash in retirement. At the same time, for anyone with money to invest, right now represents an extraordinary opportunity.
Some companies will come out of the coronavirus battered. Most, however, are currently deeply undervalued. Stock prices reflect market-wide fear and short-term loss of revenue more than any actual weaknesses in a company’s underlying business model. Coffee shops may be currently empty, but in a year or two or three they will be as busy as ever. Airlines may be struggling, but by next summer those planes will be full again.
Hold back the money you’ll need for an emergency. If you’re concerned about short-term cash, buy assets that you can sell off quickly. But if at all possible, a bear market is often the right time to buy.
At the same time, avoid trying to time the market’s recovery. It’s an emotional approach to trading. It plays on a combination of greed and the investor’s natural urge to just do something. Further, it depends on perfection.
Focus Your Investment Portfolio Around Funds
The 2020 recession has turned the stock market upside down. For the next year, professional investors will spend their time trying to predict specific industries that will bounce back. Some companies will flourish; others may not survive.
Retail investors looking to grow their money during the current market can mitigate risk by focusing on funds. More specifically, look towards either mutual funds or exchange-traded funds (ETFs). Buy industry-specific funds if you would like to bet on that sector’s success. Or simply invest in market-index funds, then hold them while the economy bounces back, even if that takes several years.
For the foreseeable future, just about any degree of risk will be significantly magnified, particularly when it comes to buying individual equities. You can even that out by investing your money in the entire market – think the Russell 3000 – and letting the chips fall on specific companies where they may.
Invest Your Money in Stages
Just like there’s no good way to predict which companies will bounce back, there’s also no good way to predict a market timeline for the next year. On the bright side, though, the market appears to be beginning its recovery. This might continue if investors gain steady confidence in the government’s ability to fight the coronavirus and stabilize the economy. It might reverse in a period of days if investors change their mind about those factors. There’s no good way to tell.
The best way to mitigate that risk is by investing in stages. Buy new investments on a weekly basis, perhaps, or every 10 days. Pick a schedule that works for you and stick to it. If you’re buying bonds, use a ladder approach. If you’re buying stocks, considering dollar-cost averaging.
Like all investing strategies, this will mean passing up on some opportunities in order to mitigate risk. You will not be able to time the market and flood all your money in at its low point. To compensate for that, however, you will mitigate the risk of market volatility. No one knows when the stock market will bottom out. But by investing steadily over a period of time you’re more likely to buy in when prices are good.
Right now is a difficult time for both investors and anyone who needs to begin withdrawing assets soon. Retirees and families with children headed off to college will face difficult months ahead as they figure out how to adjust long-laid plans. For everyone else, however, with a little bit of patience and prudent budgeting, this does not have to be a financial catastrophe. Instead, it could be the foundation for significant long-term gains.
Bottom Line
A bear market means that cash will be tight. However, investment opportunities are present if you can pursue them without risking your emergency fund. Invest for the long haul, resist the urge to panic-sell and hold tight. The market will be back.
Tips for Investing During the Time of Coronavirus
- Consider talking to a financial advisor about how to invest during the pandemic. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors who will help you achieve your financial goals, get started now.
- Investing in index funds is a safe option during a recession. But if you’re looking for a slightly more aggressive approach, check out some free investment classes to learn more.
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