Since the onset of the Coronavirus Pandemic, we saw the end to one of the longest bull markets and economic expansions in our nation’s history. The bull market, which is characterized by rising stock prices and, generally, a strong economy, started at the market lows reached on March 6, 2009 and officially ended when the market dropped by 20% on March 11, 2020.
What a difference a month makes. In a mere 30 days, investors have gone from jubilantly buying into the stock market to many selling in a panic. Evidence of this is the fact that we just endured the fastest market drop in history with the Dow Jones Industrial Average dropping by 38.4% from the highs on February 12, 2020 to a low of 18,213 on March 23, 2020.
While many investors may be losing confidence in their investments due to the market volatility, there are some who are viewing the recent weakness as an opportune time to add to their stock portfolios.
Why Invest During a Recession?
Choosing to invest during a market downturn can make a lot of sense - asset prices have fallen hard, meaning those willing to invest now can likely get bonds, stocks, real estate and more for a fraction of what those assets are normally worth.
If you are years, or even decades away from retirement, you may really benefit from the recent market volatility. Younger investors have a very good friend when it comes to investing. That friend is called “Time”. Taking advantage of the power of compounding requires time for the compounding to work. It also requires rising investments. While past performance is no guarantee of future success, the stock market has never had a negative return over a 15 or 20-year period. The worst 20 year rolling return was 6.4% in 1979. So, if you have time, investing in a stock market that had declined by 30% or more can make sense.
Here are some things to consider before making the leap into the stock market:
Consideration #1: Is My Emergency Fund Fully Stocked?
The coronavirus is exposing a weakness in many Americans financial plan: liquidity. Building an emergency fund that’s held in a safe investment vehicle like a savings account is a must to have a rock-solid financial plan. The emergency fund is earmarked to be used as a cushion during a financial emergency and most planners will recommend 3-6 months income as a rule of thumb. Although this number may vary based on your personal financial situation. For many Americans, the coronavirus is the type of situation where an emergency fund can come in handy. The average American does not have this box checked with regard to their finances. In fact, a recent article by CNBC indicated that the average American has $8,863 in savings. This number varies by age with those under 34 having saved as little as $2,729 in savings. If they happen to be off work for a few months, this emergency fund may dwindle quickly.
As we deal with the shutting down of the government during the coronavirus pandemic, we are already seeing record numbers of Americans filing for unemployment. On Wednesday, March 26, 2020, the government reported a record jump in the number of Americans filing weekly unemployment claims. The average had been around 200,000 for many months and the March 26 report came in at 3,283,000.
Even if you’re certain your job is secure and stable, it doesn’t mean you’re immune to loss of income. The number of cases of COVID-19 is growing every day, meaning it’s entirely possible that you may need to care for a sick loved one sometime soon. Depending on your job’s policy on leave and your eligibility for the recently passed Families First Coronavirus Response Act, this could mean going for an extended period without a paycheck or having to quit your job altogether.
The bottom line: you should have enough money in savings that you would feel comfortable living off of that money for at least 3 months. Consult your advisor to determine if you have enough money to cover a prolonged emergency such as we are being presented with by the coronavirus pandemic.
Consideration #2: Would It Be Better to Pay off My Debts?
In the fourth quarter of 2019, the New York Federal Reserve reported that American household debt rose to $14.15 trillion.3 While the majority of this debt covers things such as housing, auto loans and student loan payments, this still leaves $46 billion in credit card debt.3 If you find yourself in the position of choosing between paying down your debt or investing there are plenty of factors to consider and this would be something to consult with you’re an advisor about. Working together, you may find that paying off debt will serve you better over increasing your investments.
Consideration #3: Am I Rushing Into This?
While the coronavirus is new, market volatility is not. And while it certainly feels like someone flipped a switch and we went from expansion and stock market gains to a recession and stock market losses, it’s important to remember that recessions can stick around for a while. The definition of a recession is an economic contraction that lasts for two quarters. However, the recession of 2008-2009 was with us for 18 months. What does this mean for investors eager to jump at lower stock prices? It means you may have time. This is where seasoned financial advisors can add value for you. They can help you determine when to invest, where to invest and how much to invest. Making hasty, emotional decisions rarely works out well and there are many advisors who are trained at helping to take the emotion out of investing.
Consideration #4: Am I Emotionally Prepared to Watch My Money Drop?
Lets face it! We are all emotionally attached to our money. We worked hard to save and, when our account balance is dropping, it can be taxing for even the savviest of investors. Investing can be like riding a rollercoaster. Up one day, down the next. If you choose to invest in a declining market, you have to be emotionally prepared for the probability that the market hasn’t reached rock bottom. Most investments fluctuate daily. Being emotionally ready for such volatility is a necessity for long term investment success. If the emotional toll of a declining investment is unbearable, then the potential gains may not be worth the worry. Discuss this at length with your advisor so there are no surprises.
Consideration #5: Am I Still Following My Normal Investment Procedures?
Whether it’s stocks, bonds, precious metals or real estate, it is important to develop a plan before you risk one penny in a fluctuating investment. Develop a plan and stick with it. If your asset allocation was correct before the market turmoil, then chances are pretty good that your asset allocation is correct today. That doesn’t mean you put things on autopilot and forget about it. If you are nervous, call you advisor and discuss what is happening. Plans can and should be tweaked occasionally. However, resist the temptation to make a change simply because you don’t like the current outcome. Again, this is where a seasoned and trained advisor can help.
Americans in 2020 are facing a future of uncertainty, between the global pandemic of COVID-19 and the economic instability of a recent market downturn. If you’re in a position to do so, investing now could prove to be a beneficial move for your portfolio, but it is important to consider your decision carefully and thoroughly. Now more than ever, be sure to keep us in the loop and consider your next financial decisions carefully as you navigate through these upcoming months.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.
Securities offered through IFP Securities, LLC, dba Independent Financial Partners (IFP), member FINRA/SIPC. Investment advice offered through IFP Advisors, LLC, dba Independent Financial Partners (IFP), a Registered Investment Advisor. IFP and Callesen Wealth Management are not affiliated.