We are currently living through an unprecedented time in our world. Businesses are forced to close down as governments navigate their way through new coronavirus management strategies, and many companies have laid-off employees as a result. Schools have closed for the year, stay-at-home orders have been announced, and even toilet paper is in short supply.
Not surprisingly, the stock market has taken a few nosedives along the way. This volatility has left many investors scrambling and even panicked about the future, wondering how this pandemic will impact their money now and in the long-term.
No matter where you are in your financial journey, it’s not surprising if you are worried about how COVID-19 will affect your investments. However, there are a few things to keep in mind along the way.
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A Dangerous Way of Thinking
Odds are, you’ve encountered two types of people during this pandemic.
One intends to keep investing as usual, maintaining the same portfolio contributions and allocations they always have. These folks aren’t jumping to deviate from the usual plan–instead, they are playing the long game and riding the peaks and valleys of the market.
The other group feels a bit more reactive. Some of them want to sell (or may have already sold) their investments in panic while others are hoping to time the market for profit. Unfortunately, this way of thinking might actually be dangerous.
“This is the time to buy!”
If there’s one thing I’ve heard almost daily since this all began, it’s that now is a great time to start buying up stocks. However, for most people, this probably isn’t the right buying opportunity.
For most people, buy-and-hold is still the right approach. Stick to your plan, maintain your same asset allocation, and stay steady. For long-term investors, being a do-nothing investor is usually wise, no matter how uncomfortable it is or what the market is doing.
Speaking of the market: trying to time your investments is almost always a bad idea. Yes, some investors get lucky on one or both ends, selling at just the right time and jumping back into the market at the right time. However, it’s exactly that… luck.
Plus, if you look at actual valuation numbers (P/E), you’ll see that we haven’t hit anywhere near the bottom yet. Stocks are not “cheap” right now, at least not from a historical standpoint. We are too close to when the market was high, so prices feel low, but the market can still drop quite a bit more.
We don’t really know just how deep the impacts of the coronavirus will be on our economy. This is a scenario we have never faced before, so we can’t say this is a good time to buy because we don’t actually understand what this is. It’s likely that things get much worse before they get better, so buying up investments today probably isn’t as beneficial as it may seem.
“The worst is over.”
The initial shock of the coronavirus and state-wide shutdowns is over. We got through it, though it was bad. The market even seems to have stabilized. The worst is behind us, right?
Eh, that might not be the case. In fact, there may be lots more ahead economically… we are still in for a very difficult time.
Business are still closed or limping along right now, both big and small. The travel industry is suffering, and that won’t simply recover overnight. Small businesses (restaurants, shops, etc.) have been hammered. Many are offsetting some deliveries and take-out options, but it’s just not enough. Then, there’s the influx of unemployment to contend with.
We are looking at months of these effects, at minimum. This lost money cannot be made up down the line, either–it’s just gone. Yes, business will resume at some point and jobs will be regained, but we won’t simply regain what we’ve lost economically.
This won’t be over quickly, and we are all likely in for a difficult time. However, we will get through this. In the meantime, everyone should hope for the best but still expect the worst.
How COVID Will Change Us
We are living through a circumstance that is entirely unprecedented, so it’s hard to know exactly what the coming months and even years will look like. But what we do know is that the coronavirus is likely to change all of us and how we approach our finances.
The Great Depression influenced an entire generation. Of course, most of this influence wound up being positive in the end. It changed people’s view of money and spending, shaping how they approached everything from wastefulness to contingency funds.
Odds are, COVID-19 will have a similar effect on us. As a generation, we are likely to see our resources and think about money differently moving forward–and it’s probably already begun.
We are no longer thinking about getting that next new car or toy or home that we can afford–instead, the focus is on what we need. Most of us are in survival mode, even if we are still earning our typical income. This means limiting unnecessary spending and putting aside whatever we can, just in case.
Many of us have probably started to view emergency funds in an entirely new way. After seeing just how quickly our situations can change, and how little control we could have over a situation, it really drives home the importance of a solid safety net.
What We Can Do Now
We will make it through the impacts of the coronavirus, whether that takes weeks, months, or years. And when we come out the other side, we will all be stronger and wiser for it.
For now, though, there are a few things that all of us can do to ease the pinch and better prepare for the future.
- Get rid of what you don’t need: Now is a great time to reevaluate your monthly spending and trim the fat. Cut the cord, renegotiate cell phone bills, and limit your personal spending, then put all of the savings in an emergency fund.
- Don’t pay for what you aren’t using: If you aren’t driving your car regularly, consider lowering your coverage limits or canceling your auto insurance coverage altogether to save money each month. The same goes for memberships, subscriptions, and recurring services.
- Prepare your finances: You’re homebound anyway, so this is a great time to create or refresh your money binder. Reevaluate all of your assets, update accounts, revise your will… whatever you need to be better prepared.
- Take advantage of any and all opportunities: There are so many options available to you right now through the CARES Act, federally-backed student loan forbearance, credit card and mortgage help, or expanded/extended unemployment. Take advantage of all of it that you can! This could save you money on interest, as well as allow you to set extra cash aside for the time being. And it won’t hurt your credit in any way, either.
Just be sure to get the details on any forbearance opportunities you utilize. For example, if your private mortgage lender allows you to delay payments, you may be required to pay it back in a lump sum at the end of that time period.
While the coronavirus pandemic–and its impacts on the entire world–are both scary and unprecedented, just know that we will get through this. It’s important to prepare for the worst, but also stay optimistic.
The economy will get back on track. The market will recover. Just expect that it will get tougher before it gets better.
Being a reactive investor is almost never a good idea. Rather than selling in response to a crisis or trying to time a bottomed-out market, hold steady. As investors, we should acknowledge that we are in it for the long game. Instead, use this time to better your financial strategy moving forward and even trim the fat on your current spending–you’ll come out of this pandemic wiser and stronger for it.