Over the course of a few short weeks, the fast-spreading coronavirus has prompted seismic changes in the economy and daily American life.
With the stock market plunging into a bear market and jobless claims climbing above 3 million — along with news of relief in the form of expanded unemployment benefits, lower interest rates on credit cards and student loans, and stimulus checks — you may be grappling with new financial questions, particularly when it comes to your investments.
Experts predict that people will be sheltering in place for weeks, and possibly months, so it may be some time before the news calms down. In the meantime, one way to stay calmer yourself is to take control of what you can, like by building up your financial literacy.
Now is a great time to brush up on your investing knowledge, from how to pick an investment to what to do when the market plunges, or how to figure out your asset allocation.
Here are 14 investment questions you should know the answers to in a period of uncertainty.
They provide an opportunity to grow your money over time. While there are risks — stocks can go up and down, and companies can go bankrupt — there’s also the opportunity for larger returns than you might get by putting all your money in a savings account (or under your mattress). Investing can also provide income outside of your paycheck through dividends.
It depends on what you need your investments to do for you, and what holes you need to fill in your portfolio. If you’re looking for rapid growth and can handle a lot of risk, you might look to new tech companies, for example. If you want a safer bet, blue-chip stocks might be for you. To diversify your portfolio, it’s wise to invest in a range of different stocks and sectors.
When deciding whether to buy shares of a company, you may want to consider its earnings history and projections and the current stock price relative to its 52-week high and low. You can also read analysts’ reports and ratings.
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If you invest all your money in one stock and it goes down, you can lose a lot of money (assuming it doesn’t go back up before you need to sell). But if you invest in a mutual fund or exchange-traded funds (ETFs) you can own an array of stocks, bonds, and commodities, or a combination of all three, which allows for broader diversification than with just one investment.
These funds make it easier to buy a collection of assets at once. For example, if you invest in an ETF that tracks the S&P 500, that means your investment will track the performance of 500 companies.
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Owning both stocks and bonds is how many investors diversify their portfolios, as stocks tend to be a riskier investment, while bonds are generally considered safer. For that reason, as you get older — and closer to retirement age — experts recommend shifting your asset allocation toward owning more bonds.
Your ideal asset allocation will depend on your age and your tolerance for risk. If you're in your 20s or 30s, Baltimore-based money managers T. Rowe Price suggests aiming to have 90% to 100% in stocks because of your long investment timeline, with up to 10% remaining in bonds.
However, a 60-year-old’s portfolio might be 50% to 65% stocks, 25% to 35% bonds, and 5% to 15% in cash.
Bonds are essentially loans you give an issuer (typically a company or a government agency) with the expectation that you’ll get paid back, with interest, over a specific time frame. While there’s always the risk that the issuer will encounter financial troubles and be unable to make good on the plan, this isn’t a common occurrence — making bonds a relatively safe investment.
That’s compared to stocks, which are investments in a public company. Your shares go up and down with the company’s value, which can be affected by a wide array of (often unpredictable) factors, including management decisions, government regulations, and macroeconomic events.
If your plan is to invest for the long term, you are bound to experience some day-to-day volatility along the way. But, historically, the stock market has recovered from downturns, and continued to climb, over time.
Generally, you should only invest in stocks or stock funds with money that you won’t need for at least a few years, as the market fluctuates and you don’t want to be forced to sell a stock that’s down because you need the money. Investors often have mid- to long-term goals in mind, like saving up for a down payment on a house you plan to buy down the road, or for retirement.
If you’re concerned about a particular investment that’s losing value, go back to square one and think about why you chose it in the first place and what’s changed since. For example, if the company or fund has experienced big management or strategy changes, you might reconsider its place in your portfolio.
On the other hand, if nothing much has changed about the company, the price fell in step with the market at large or the sector it’s in, and you believe in the company’s future and projected earnings, it could be worth hanging onto — and, perhaps, buying more shares in — as the market has historically recovered from downturns over time.
Typically, you’d hold a bold to maturity (or when the original amount loaned becomes due) to reap the full benefit of a payback, but you can sell early on the secondary market via a broker. Just understand that you may wind up with more or less than what you paid originally, as the value of the bond may shift on this market. If interest rates rise, the bond’s value may drop — and vice versa. And you may be charged a commission by the broker.
After a period of relative calm, the stock markets have been unusually volatile in 2020. In a 13-day span between late February and early March, the S&P 500 lurched higher or lower by at least 3% on nine different trading days. By comparison, moves of this magnitude historically have happened about four days a year, on average, since 1980.
Comparing stock performance to an appropriate benchmark is a good way to gauge how it’s doing. For example, on a day when Standard & Poor’s 500-stock index drops, a drop in the price of a large-company stock you own can be expected.
On the other hand, if your stock falls 5 to 10% more than its benchmark, you might want to take a closer look at what’s going on with the company and reassess its place in your portfolio. Remember, though, that many individual stocks can experience dips and then rebound. So it’s important to look at what’s triggering the drop in a particular stock’s value, and how it’s performed over the long run, when deciding how to proceed.
Don’t panic. A well-diversified portfolio is designed to grow over the long term — and offer some protection against market fluctuations. Keep your longer term goals in mind, and don’t let your emotions drive your decisions.
If you're feeling anxious during a period of high volatility, that's normal. If the bumps are making you queasy, you can stay calm by focusing on your long-term goals, keeping abreast of the news while not fixating on every alarming headline, and instituting a 24-hour waiting period before making any kind of long-term decision about your investments.
Recognizing that your goal is to invest for the long haul can put things in perspective. In the past, the market has always recovered and then continued to rise.
On March 11, after ongoing volatility and heightened concern about the spread of the coronavirus, the U.S. entered a bear market, ending the most recent bull market's 11-year run. This change might feel out of the ordinary, but bear markets are not that rare.
The market has cycled between bull markets — when the market increases 20% or more in value — and bear markets—when the market decreases by 20% or more — many times in history. From 1926 to 2014, according to an analysis by First Trust Portfolios, there have been eight bear markets, lasting an average of 1.3 years and averaging a cumulative loss of 41%. Alternatively, there have been nine bull markets, lasting an average of 8.5 years and returning an average of 458%.
If you're a long-term investor, a bear market is "the sale of the century" for stocks, Jamie Cox, managing director at Harris Financial Group, recently told Grow.
"Selling your stocks may be the most expensive mistake of your investing career," Cox said. "Opportunity cost is where people have to really pay attention during these heightened periods of volatility."
For your short-terms savings, consider certificates of deposit and money market accounts. Both typically offer higher interest rates than the average savings accounts and still keep your money secure, though with CDs your money will be tied up for a certain period of time.
Other long-term investments you might consider include real estate and commodities. You can invest in a fund focused on real estate, precious metals, energy or some other sector. Another possibility is investing in a real estate investment trust (REIT), which is like a mutual fund that invests in income-producing real estate. These kinds of alternative investments are generally considered riskier bets, so you may want to limit these holdings to a small slice of your portfolio.
Technically, you can, but it can be risky, difficult to get into (and out of) and is typically reserved for the wealthy. Under rules adopted by the U.S. Securities and Exchange Commission (SEC) in 2015, it became a little easier to invest in private small businesses using online platforms such as SeedInvest and Wefunder.
You used to have to be an “accredited investor” (with a net worth of at least $1 million or an annual income of at least $200,000 for the last two years) in order to participate in this kind of investing. Now, if your net worth or earnings are less than $100,000 a year, you can invest up to the greater of $2,000 or 5% of your annual income or net worth (whichever is less) into a small business. Those with an annual income and net worth of more than $100,000 can invest up to 10% of their annual income or net worth, whichever is lower.
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It depends on your own unique situation. Typically, you should have a checking account for your regular spending, a savings account for your near-term goals (and your emergency fund), and investment accounts for your mid- to long-term goals.
If you have kids, you might have a 529 plan for each of your kids’ college funds. You may also have multiple investment accounts, including an employer-sponsored retirement plan like a 401(k) and an Individual Retirement Account (or IRA), plus a taxable brokerage account.
During a period of uncertainty, you might want to revisit your distributions or reassess your goals.
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