It’s a safe bet to say that the majority of us have never been through a pandemic before. Add to that the volatility of the markets, and instead of just worrying about the Purell and toilet paper shortages, a lot of us are freaking out about our money. Unless you’re planning on retiring tomorrow, you have a lot of options to consider on what to do with your savings aside from
stuffing it under your mattress or in the piggy bank.
We asked a few financial advisors what the best plan is for the foreseeable future and here’s what they had to say:
Avoid herd mentality
“Investors should not concern themselves with broad market moves or the crisis de jour,” offered Robert R. Johnson, PhD, CFA, CAIA Professor of Finance, Heider College of Business, and author of several books including Investment Banking for Dummies. Consider doing absolutely nothing: If you’re wondering what to do with existing investments, the answer might be nothing at all. “Review your allocation and the objective for the account to make sure that you comfortable with the strategy that is in place to accomplish the objectives set for the account,” advised Ronit Rogoszinski, CFP of Women and Wealth Solutions.
She explains that “If any major differences arise, address them by reviewing both your feelings towards the differences as well as the rationale behind them. Sometimes doing nothing while it
feels awful, may be the best thing to do.”
Keep thinking long-term
“Investors saving for retirement need to keep to their long-term game plan. The need to save for retirement hasn’t changed in the wake of the virus outbreak,” shared Mark Hamrick, Senior Economic Analyst, Washington Bureau Chief for Bankrate.com via email. Rogoszinski says that you should “revisit the reason you are in the market in the first place. If the reason you set forth initially is still the reason today, then not much needs to change.” She offers an example, “If you rolled over funds from a 401k to an IRA and are looking at more than several years before needing to or being able to withdraw income from it, then there is not much needed at this time.”
It doesn’t have to be a risky prospect
If you’re okay with more of a long-term investment strategy “Invest in a well-diversified basket of stocks — think S&P 500,” recommends Johnson. And while you’re at it, “keep investing via dollar cost averaging whether the market is moving up, down or sideways.” Johnson also explains that “Risk tolerance refers to both an ability to bear the risk and a willingness to bear the risk. Young people have the ability to bear risk because they have a long-time horizon. But they may not have a willingness to bear risk. That is, the potential of losses may cause them to lose sleep. In fact, when it comes to building wealth, one can either sleep well or eat well. Investing conservatively allows one to sleep well, as there isn’t much volatility. But it doesn’t allow you to eat well in the long run because your account won’t grow much.”
You might not belong in the stock market
Don’t feel bad about it, not everyone is cut out to be an investor. “As far as protecting oneself, if you can’t weather a drop of 20 to 25% or even more, you should not invest in the stock market,” said Johnson who said that “In his recent Berkshire Hathaway shareholder letter, Warren Buffett wrote ‘Anything can happen to stock prices tomorrow. Occasionally, there will be major drops in the market, perhaps of 50% magnitude or even greater.’ The letter was released in February.” If financial rollercoasters aren’t your thing, you should find a safer space to keep your hard-earned bucks.
It’s a personal thing: In theory, it might help you to talk to a friend in similar life circumstances to try to brainstorm next steps. In practice, it’s probably a bad idea. “Understanding that there is no one size fits all answer here is crucial,” Rogoszinski counsels, “as the individual’s financial status, age, time to sit in the market, risk tolerance, objective, goals and other details are needed
to be addressed before a strategy can be formulated.”
Plan for the long haul when possible
Even if your retirement is nipping at your heels, you should try to calmly figure out what your best options are overall. “It is important to have a financial game plan that can stand the test of time. That test includes good times and bad, including the inevitable cycles in the economy and in financial markets,” said Hamrick.
It isn’t all bad news
It’s possible to look at the bright side even during downtime in the market. “Those participating in retirement plans where contributions coming from paycheck take place systematically should be celebrating that their deposits are buying up more shares i.e. shares are on sale!!” enthused Rogoszinski. “If, however, your cash is needed to pay next months’ bills and there is little left after on reserves then the answer may be to not invest. Looking at your overall financial well-being now and every day is the key to answering this question.”
It’s okay to be practical
“For those who are looking to have ready access to cash, consistent with being prepared for and saving for emergencies, there is a range of good options including traditional savings accounts,” Hamrick said. To that end, he believes “It pays to shop around to look for the best yields on savings including those offered by online banks.” But before locking away your money, you should take your day to day needs into account as well. “If easy access to a bank branch or ATM is a higher priority for you,” Hamrick said, “you’ll need to take that into consideration as well.” This is a great time to brush up on your investment skills.
Create an IPS
Johnson explained that “all investors should establish what is called an Investment Policy Statement (IPS) and follow it. An IPS is a written document that clearly sets out an investor’s return objectives and risk tolerance over that investor’s relevant time horizon, along with applicable constraints such as liquidity needs and tax circumstances.” While you’re spending time journaling, you might consider drawing up your own IPS which Johnson says in essence “sets out the ground rules of the investment process – it is the document that guides the investment plan. Included in that IPS is a target asset allocation. The IPS should include a glide path for target asset allocation changes as the individual ages. All investors should have an IPS.
And, it is best to develop an IPS in a rather calm market. Developing an IPS in a volatile market or during major stories is problematic. The whole point on an IPS is to guide you through changing market conditions. It should not be changed as a result of market fluctuations. It only needs to be revised when your individual circumstances change — perhaps a divorce or other unanticipated life change. It shouldn’t be adjusted as a result of the crisis de jour, which now is the Coronavirus.”
It might also be interesting to read surveys on the topic to see how you compare with the national average. For instance, Hamrick said “Our Bankrate surveys have consistently found that the top
financial regret is the failure to save for emergencies and for retirement. A prudent approach helps to avoid those regrets, while also paying down debt.”