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The coronavirus pandemic has caused widespread changes to countless aspects of daily life, from how people are working and communicating to how they grocery shop. And the economy has certainly felt the impact.
With the stock market experiencing a roller coaster of fluctuation, and headlines describing the contracting economy and speculating on what the future could look like, it is not a surprise that people are concerned about their investments.
In times of uncertainty, it can be tempting to make sudden changes to your investing strategy. Seeing a huge decline on your statement stings, but making quick trades trying to capitalize on the situation or cashing out of the market completely out of fear could be a rash decision.
So, what is the right move when it comes to investing through market volatility? Well, finance is personal and there’s no one single right move. What’s right for you will depend on your unique financial circumstances.
We’ll review some of the common considerations people might want to take as they navigate their investment plan in the light of COVID-19. If you have questions specific to your financial situation, consider speaking with a financial advisor who can offer suggestions and insights curated to you.
Determine Whether or Not Investing is a Top Priority
Take a look at your financial situation and see if investing is the right choice for you, or if there are other financial goals that should take priority.
Those fortunate enough to have a strong financial foundation to rely on may want to make investing their financial priority.
In this case, let’s consider a strong financial foundation to include having:
- An emergency fund of three to six month’s worth of expenses.
- All “bad debt,” has been paid off. I consider bad debt anything with an interest rate of 7% or higher (think: high interest credit card debt).
- Income protected through things like disability and life insurance.
Those who don’t have all of these boxes checked, might want to focus on building a stronger financial foundation by filling in the elements above that are missing.
One opportunity to invest, even without a rock solid foundation, could be through an employer sponsored program like a 401(k). This is especially true if the employer offers matching contributions.
These matching contributions, usually up to a certain percentage, can be helpful in boosting your retirement savings—so if it’s on the table, it can be smart to take advantage of it.
What Is the Goal for the Money?
A key step to investing is understanding what you are investing for and when you’ll use the money. The time horizon for the goal will inform the underlying investment strategy.
Financial goals generally fall into three categories: short-, mid-, and long-term. Generally speaking, the longer the time horizon, the more risk an investor can stand to take on.
Anything you plan to spend within one to three years is considered a short-term goal. This could be something like an emergency fund, a wedding, or a dream vacation.
For short-term goals, investors will generally want to focus on low-risk options – things like cash equivalents, like a cash management or high-yield savings account, or short-term fixed income.
Mid-term goals fall in a five- to 10-year time frame, and a long-term goal falls over the 10-year mark. With a long-term financial goal, there is more time to withstand fluctuations in the market, which can make investors feel more comfortable taking on risk.
For long-term goals especially, it’s also worth noting that cash isn’t always king. Over the last decade or so, cash has not even kept pace with inflation, which means that you could be losing purchasing power by keeping too much of your money in cash.
Understanding the Importance of a Diversified Portfolio
An investor with a good understanding of their financial goals will be able to build a diversified portfolio that is built for the long-term and aligned with their goals, time horizon, and overall comfort with risk.
Diversification is essentially building a well-rounded portfolio that has a variety of investments spread across different asset classes.
Spreading the investments out this way can help investors weather market volatility – the theory being that not all assets and sectors will perform the exact same way during the same macroeconomic circumstances. This can help smooth out the volatility a portfolio experiences over a long period.
Making Investing a Habit
Another important consideration is understanding the importance of making investing a habit. Regularly investing a set amount of money in consistent intervals, regardless of the market fluctuation, is called dollar cost averaging.
Setting regular investing intervals can help prevent people from trying to time the market, which generally speaking, is nearly impossible.
Plus, as the price of shares fluctuate, investing at consistent intervals means investors will likely buy shares both when the stock is experiencing a low and a high—the key is consistency.
Making investing a consistent habit also means that investors can benefit from compound interest – interest is calculated on the principal investment and the interest that investment has earned so far.
The earlier a person can get started investing, the more time they’ll have to take advantage of the power of compounding interest.
To visualize how the power of compound interest could impact your investments, take a look at this compound interest calculator.
Factoring in Fees
When it comes to investing, there are a lot of elements outside of your control. No one can truly predict how the markets will perform or which stocks are set to take off. But what can be controlled by the average investor is his or her high-level investment strategy and designing it to be efficient when it comes to fees.
Fees could take a substantial chunk out of a person’s earnings over time, so it can be helpful to be conscious of fees as you get started investing.
Finding Help, if Needed
With this awareness, you’ll ideally be in a better palace to determine how you want to invest. Depending on your preferences, that could be an automated approach, an active strategy, or a hybrid approach that combines the two.
When it comes to investing, you don’t have to do it on your own. There are a bevy of qualified professionals who can leverage their experience to provide personalized advice for your portfolio.
At SoFi, all members have complimentary access to credentialed financial planners who can offer insights after carefully reviewing your full financial picture.
This story originally appeared on SoFi.
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Originally posted at https://wallethacks.com/investing-during-covid-19/