When stock prices rise on a sustained basis, they call it a bull market. And until last month, we’d been enjoying the longest-running bull market in history, with the S&P 500 rising 450 percent over the past 12 years.
And then, suddenly, the bull became a bear. That’s what they call the market when prices fall 20 percent from their peak. And thanks to COVID-19, it took just 16 days for the S&P 500 to hit bear territory, making it the fastest-arriving bear market on record.
So, what’s an investor to do now?
For decades – indeed, through every crisis our nation has experienced over the past 34 years, including the crash of 1987, 9/11, the dot-com bubble and the 2008 credit crisis – we’ve steadfastly advised our clients to stick with their globally diversified investments, stay focused on the long-term and allow us to rebalance their portfolio throughout the crisis. We believe this approach is sound, which is why we manage our clients’ assets this way.
But we all know that past performance doesn’t guarantee future results. So, given that no one alive has ever experienced a pandemic like COVID-19, is our investment management strategy of diversification, long-term focus and rebalancing still the right approach?
It's a fair question, and you're not crazy to be asking it. And the answer is: Yes.
More than ever, based on our economic and financial market analysis and information provided by the world’s leading medical experts who are at the forefront of the fight to defeat this novel coronavirus, we are convinced our approach to financial planning and investment management is precisely the advice you should be following.
And there’s more you can do than merely sit tight with your investments. In a world where life seems out of control, you actually can take control of your situation. In that light, here are six action items for you to consider right now:
Prior to the emergence of COVID-19, the economy was strong and growing – and we expect the economy to return to its prior status after COVID-19 is defeated. With medical and biotech experts saying they expect vaccines to be distributed in about a year, low stock prices might not last long! This represents a great buying opportunity – the best we’ve seen since the 2008 credit crisis!
So, if you have ample cash reserves and a long-term time horizon (five years or more before you’ll need to use the money, and the longer the better), you should consider adding to your portfolio to capture today’s securities prices.
If you like this idea but are concerned that prices might fall further before they begin to rise, use dollar-cost averaging: Instead of investing, say, $50,000 all at once, invest $5,000 per month over the next 10 months. This way, you’ll get the average cost for the shares you’ll be buying. This will help smooth out the volatility and reduce your risk of “buying high” with the cash you want to invest.
You should also consider increasing your contributions to your retirement plan at work. You get paid at a regular interval, and the same portion of your paycheck will go into your retirement account. It’s dollar-cost averaging! So please increase, don’t decrease, your contributions to your retirement plan at work!
2. Build cash reserves.
We routinely recommend that you maintain 12 months of spending in cash reserves. When you encounter unexpected bills, like an auto repair or potholed driveway, your rainy day fund lets you pays those bills without having to withdraw money from your portfolio.
If you don’t have sufficient cash in reserve, now is the time to do so. Simply cut expenses – easy to do these days, with everyone staying home – so you can divert as much of your income to your bank savings and checking accounts, money market funds or U.S. Treasury bills.
Only after you’ve built up your cash reserves should you invest more into your portfolio. (Yes, we love today’s buying opportunity, but cash reserves come first.)
3. Refinance your mortgage to a 30-year fixed-rate loan.
In an effort to reduce damage to the economy, the Federal Reserve has lowered interest rates to historically low levels. You should take advantage of this unique opportunity to refinance your mortgage!
My award-winning book, The Truth About Money, reveals 11 great reasons why you should have as big a mortgage as you can get and never pay it off. Now, that advice is stronger than ever, thanks to super-low interest rates.
And you might be able to get a new, lower interest rate without even having to refinance! Lenders realize that they need to offer you lower rates or risk losing your loan when you refinance elsewhere. So, a simple “rate reduction” can lower your rate without the hassle and cost of a complete refinance.
For example, Jean and I just did a rate reduction on our home’s mortgage. We cut our rate to 2.875 percent, fixed for 30 years – and the fee was just a few hundred dollars. No appraisal, no paperwork, no settlement or title fees, which would have cost thousands of dollars.
Whether you should keep your current loan, refinance or rate-reduce depends on your situation, including the:
- Timeframe you plan to keep your home.
- Current rate, payment and other loan terms.
- Cost of the transaction.
Let us help you decide if a refi or rate reduction is right for you. You could save hundreds of dollars per month!
4. Consider canceling your auto insurance.
How many cars do you own?
You might have two or three. But during this crisis, while sheltering in place, you only need one car to go to the grocery store once a week. So, cancel your auto insurance on your other cars. Doing so might save hundreds of dollars per year. (Some states require that you maintain liability coverage on all registered vehicles. But you can still cancel the collision coverage.)
5. Update your estate plan.
COVID-19 has given estate planning a new aura of importance.
The Centers for Disease Control and Prevention says up to 65 percent of the U.S. population will be infected by the virus. Current mortality data suggests that an unspeakable number of Americans may die before COVID-19 is defeated.
Patients requiring ventilators are sedated; they are no longer able to express their preferences regarding medical treatment. If you don’t have your medical advance directive and power of attorney in place, intensive care unit doctors might not manage your care the way you want. And you’d be leaving traumatic decisions to family members who might disagree – creating great angst during the most difficult of emotional times.
And if you pass away without proper estate documents in place, your family could experience a difficult, lengthy and arduous estate-settlement process.
So, if you don't have a will, medical advance directive and power of attorney, get them NOW!
And if you do have these documents, you probably signed them years ago. So, read them to confirm that they say what you currently want them to say – because your views may have changed. If necessary, have your estate attorney revise the documents for you. Then talk with your family so they all know your views.
Finally, review and update your beneficiary designations on your workplace retirement accounts, individual retirement accounts, annuities and life insurance policies. These designations override whatever is said in your will, so make sure your beneficiary designations are current and up to date. Do it now.
6. If you’re taking monthly income from your portfolio, stop.
Here is one final, very important piece of advice for you if you’re retired and making monthly withdrawals from your portfolio to generate income.
Those withdrawals require you to sell shares of your investments while they're down in value. That means those shares won’t exist when prices recover in the future. So, here's what to do:
Reduce your monthly withdrawals – or even stop them completely. Instead, use your cash reserves to provide you the money you need to pay current bills.
This is exactly what your rainy day fund is for! Well, we’re experiencing a torrential downpour right now! So, use your cash reserves instead of liquidating shares from your portfolio. This will help give your portfolio the time it needs to get through this crisis and allow its value to recover, which we fully expect will occur in time.
For help implementing these six strategies, please contact your Edelman Financial Engines financial planner.
Investing strategies, such as asset allocation, diversification, or rebalancing do not assure or guarantee better performance and cannot eliminate the risk of investment losses. There are no guarantees that a portfolio employing these or any other strategy will outperform a portfolio that does not engage in such strategies. Funds and ETFs are subject to risk, including loss of principal. All investments have inherent risks. There can be no assurance that the investment strategy proposed will obtain its goal. Past performance does not guarantee future results.
Dollar Cost Averaging does not assure a profit or protect against a loss in a declining market. For the strategy to be effective, you must continue to purchase shares in both up and down markets. As such, an investor needs to consider his/her financial ability to continuously invest through periods of low-price levels.
An index is a portfolio of specific securities (common examples are the S&P, DJIA, NASDAQ), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance does not guarantee future results.