Over the last two months, normalcy has been turned upside down and our lives have changed significantly. It’s no secret that this unprecedented pandemic has greatly affected our way of life and at times has felt very scary. Of course, no one could have predicted a pandemic would spread and change our world so rapidly, but over the last few months I’ve talked to many people who felt so generally unprepared for anything like this to happen. With that, feelings of losing control compound the fear that naturally comes along with a sometimes-deadly illness and fundamental shift in our way of life. So, I got to thinking, taking steps to be more prepared for the unknown could help everyone. I hope we never experience a pandemic like this again in our lifetimes, but there will always be something around the corner. Whether it’s a pandemic like this or the tech bust of the early 2000’s or the housing crisis just a decade ago, there will be downturns again in our lifetimes. I’m not recommending we live in fear and become doomsday preppers—just the opposite. Being prepared for the unknown is always in our best interest. Below, I’ve compiled some of the ways that we can make sure to be prepared for the future.
- Have an Emergency Fund… ALWAYS
I think more people felt the effects of this mistake than any other item on this list. Heading into the pandemic with no emergency savings was catastrophic for many families. The sudden loss of income paired with no emergency fund created a perfect storm. Our recommendation is to always maintain three to six months of your expenses in cash. In this time of uncertainty, I would lean closer to six months. Now, even those with, what they thought were, stable jobs have found that in unique circumstances that may not be the case. In times of crisis, it’s important to have your emergency fund to be able to cover necessary expenses like, mortgage, debt payments, healthcare and groceries.
- Know that the Market Can and Will Go Down
This may seem obvious if you’ve been investing a long time and have experienced the ups and downs of the market. Before this downturn, we experienced the largest bull market in history, and it was easy to get excited about investment opportunities and growth. But it is important to remember that the market goes down, on average, 10% at one point each year and 20% at one point every five years. Knowing this should shift your thinking about investments. Money that is invested should be for the long term. You should not invest money that you’ve earmarked for a down payment on the house you plan to buy in two years, or for your high school senior’s college education. Market downturns that would otherwise represent a buying opportunity for long term investors mean panic for those on a deadline. Any money that you need within five years should be kept out of the market either in cash or safe short-term bonds. It is important that the money you invest in the market has a long enough time horizon for you to withstand a market correction.
- Rebalance, Rebalance, Rebalance
Rebalancing is a critical part of investing that should not be overlooked. As an investor, it is so important to maintain an asset allocation that matches your risk tolerance and adjust consistently to stay there. For example, if your ideal allocation is 60% in equities and 40% in bonds, and a market uptick pushes you up to 70% equities, it is crucial to rebalance and bring your allocation back down to 60/40. The S&P 500 was up 29% in 2019 (Market Insider, 2019). So, if you neglected to rebalance your 60% (which, for our example, let’s say was 100% in the S&P 500), then your equity position would have grown from 60% to 77.4%. That’s a lot more risk than you originally intended if you aren’t actively rebalancing. Going into the 2020s downturn with about 17% more equity exposure than your risk tolerance can afford could explain why you are really hurting right now. Of course, we rebalance on behalf of our clients on a regular basis and help determine a risk tolerance that meets your needs.
- Continue Investing
Recently, a young woman asked me if she should stop contributing to her 401(k) because her company was pausing all matching contributions for the time being. Before offering guidance, I first asked her if she had an adequate emergency fund. She did. I explained that as a young, working professional who has at least thirty years until retirement, she should be celebrating that the market is down. Now every time she adds money to her 401(k), she gets to buy into an on-sale market! It’s like the clearance rack of investing. Like I mentioned before, as long as your time horizon is long enough, you should still be investing in the market, especially when the market is down. Yes, when the market goes down it can be scary, and you never know when it will reach the bottom. Focus instead on your long-term goals, and see how much opportunity a down market can hold. More often than not, it’s still important to continue investing into the market to pursue those goals.
None of us could have expected anything like this to happen and we cannot predict how long it will continue. But, instead of panicking, try to use the pitfalls of our current situation as an opportunity to learn and better situate yourself for the future. We hope that next time it’s not a pandemic that causes the highest unemployment rates since the Great Depression, but milder or not, there will be a next time. In the meantime, stay healthy and safe, and learn from this. If you have other things you’ve learned from this pandemic, we would love to hear from you. If you feel fear and need support, please give us a call, we are here for you.
ALANA MACY, CFP®
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
All investing involves risk including loss of principal. No strategy assures success or protects against losses. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Asset Allocation does not ensure a profit or protect against losses.