To say the last several weeks have been challenging is probably at best a sugar coated way of saying its been rough. It’s been rough on our country, on our leaders, our lives, our families, our health, our nerves. This global pandemic has wreaked absolute havoc on all aspects of any well-organized system that were in place. They have all been infected by this virus. We don’t have enough medical supplies or manpower in the health system, the financial system has crashed being down roughly 30% at times in several of the major indexes, and our daily work and home lives have been turned upside down. Several people and businesses are having to work from home, which is foreign to most people, familiar to some. Most people with kids are having to work and parent their kids at the same time, while also trying to be their teacher. These are definitely unusual times, in some aspects, we are fighting a war with an “invisible enemy” as President Trump describes it. Auto makers like GM have been turned into assembly lines to make respirators. The government is taking emergency measures to support small business and those that have been laid off since their employers had to close. In all this chaos, finances are still a significant concern for most. I have been asked by clients and multiple people what to do? Should I sell, should I buy, should I do anything at all?
If I could offer any assistance during these unprecedented times, in regards to your personal finances, please do not panic. The worst thing anyone can do is panic, especially with their money. There were days several weeks ago when we saw the DOW down by 2,000 and 3,000 points in a day, which was the equivalent to a 10-13% move. Those days definitely rattle people and they feel like they need to get out because there’s no end in sight. These moves make everyone nervous, even myself. However, the best thing to do is take a deep breath, turn the news off and take perspective. Here are a few tips depending on where you’re at in life.
If you’ve got around 5 years or less until retirement and are still contributing to a 401k or retirement plan, you’ve got plenty of time for the market to work its way back up. Plus, the money you are putting in is going in at a lower price, so you’re dollar cost averaging in. I would say what you need to do is re-evaluate your allocation to make sure you are comfortable with it. If you’re within 5 years of retirement and still 80% or more in stocks, it may be time to think about reallocating to a more conservative allocation, but you need to wait until the dust settles. Changing allocations when the market is down is basically the same as selling some of your stocks when its down, which is never the best idea. Wait until the market regains some of its losses before making any major allocation changes.
If you’ve got more than 5 years until retirement, you need to keep your course. Keep contributing if you can. Some companies may be taking away their match contributions due to the uncertainty of their business. If you’ve still got you job, whether or not the employer matches or not, I would keep making your contributions if you are financially able. This is a good time to be averaging into the market. Again, take this time to make sure you are allocated to suit your time horizon and risk tolerance. The longer time you have until retirement, the more aggressive you can stand to be.
Now for anyone that is able to do this it could yield your retirement nest egg a significant boost in the long run. Increase your contributions to your retirement plan. If you’re in a 401K plan, you can contribute up to $19,500 in 2020 if you’re under 50 years old or $26,000 if you’re 50 or older. If you haven’t reached those limits, you can definitely increase your contributions to dollar cost average your money into the market while its down. If you don’t have a 401k or employer sponsored plan, then this may be a good time to look at an IRA for yourself. The limits are $6,000 a year if you’re under 50 and $7,000 if you’re over 50. Of course, this all depends on your financial situation, if you have plenty in emergency funds saved up, and if you were able to keep your job during this pandemic. I am aware there are millions that are now without jobs, and I understand this is not an option at the time. As soon as you can start working again, make sure you have enough money in emergency funds, and then start contributing back to a retirement plan. For more information about IRA’s you can check another article I wrote called “What’s the difference between a Traditional IRA and a Roth IRA?”
For those who are wondering, what stocks do I buy here. Or maybe you’re thinking about buying a stock and holding it a few months to see if you can make some extra money. I have heard this a lot lately. The same rules always apply. If you’re going to try to pick a stock, make sure the money you are putting up to make that purchase is money you do no need any time soon and that it’s money you can stand to lose. Picking individual stocks in times like these can be very treacherous. It can be rewarding also, but it just may not pay off as quick as you may think it might. Just keep that in mind if you’re trying to pick some stocks in your trading account. If I had to choose, whether to pick some stocks or add to your retirement plan, I would say hands down add the extra funds to your retirement plan. It will more than likely be invested in a mutual fund or ETF that is well diversified which reduces your risk greatly compared to owning a handful of individual stocks.
Remember, stay calm, take perspective, make sure you’re allocated properly, and if possible add to your retirement plan. Hopefully, this pandemic will pass shortly and several months down the road things will be normal again. Maybe not the same as before the pandemic, but back to a more normal way of life.