With the global economy being brought to a halt this year, many people remain worried about their families and jobs and are thinking about what the future holds. The good news is we are learning more about the virus on a weekly basis and companies have joined together in working towards a new vaccine. However, the mix of uncertainty about when the US economy can safely reopen and how long this recession will last, has brought many investors to ask themselves: Is now a good time to be invested?
The general definition of a recession is two consecutive quarters of negative GDP or at least six months of a rapid decrease in the economy. Employment, personal income, production, retail sales, and GDP are all impacted during a recession. Since 1854 the US has had 33 recessions with the average occurrence being every five years. While the past has taught us that the financial markets have historically come back after past recessions, it can be difficult to tune out the noise and keep emotions in check. Rather than focusing on what the market is going to do, though, focus on what you can control. Maintain sufficient cash savings, keep a long-term perspective, and know what you own.
One thing this pandemic has shown us is the importance of an emergency fund. One in four Americans have lost a job or had a pay cut due to the economic shutdown. Many planners suggest having 3-6 months in cash reserves (i.e. in a bank account) to cover living expenses. A more conservative savings plan would be a year’s worth of living expenses which includes bills, food, rent/mortgage, etc. Never plan to pay for theses expenses with credit cards as that is the easiest way to get into the “bad debt” cycle.
Keep your short-term and long-term financial goals in check to help remind yourself of how much volatility your portfolio can tolerate. In most cases, if you needed access to all of your funds within the next two years, you shouldn’t have been fully invested anyways. If a recession hasn’t caused your long-term goals to change, your investment strategy shouldn’t either. If the heightened levels of volatility are causing you to stress more then maybe it is a good time to look at your risk tolerance and change your asset allocation. Before making any drastic changes to investments we urge clients to revisit their financial plan.
Another important factor to remember about investing is that when people talk about “the market”, more often than not, they are referencing the whole US equity market. This term is not meant to correlate to how your own money is invested. The media tends to overemphasize the Dow which is an index that tracks only 30 large US companies across certain sectors. The other index, which we prefer to track over the Dow, is the S&P 500. The S&P 500 tracks 500 US companies across all sectors and has certain criteria a company must meet in order to be included in the index. Since the S&P tracks a more comprehensive part of the market, it is typically a better representation of the market.
If you are an investor who feels they can “ride out” a market correction without making any drastic changes, I commend you. However, I still encourage you to check your portfolio and make sure you know what you own. I’ve never found an investment that can perform well in every type of market. Anyone who tries to sell you something they say can withstand any type of market volatility most likely has a conflict of interest with what you are buying.
We take an active management approach to our clients’ portfolios where we make strategic and tactical allocation shifts throughout the year. These changes allow us to capture more of the upside while protecting from unintended risks on the downside. So just because you have a long-term time horizon, it doesn’t mean your investment strategy shouldn’t adjust along the way. Sectors move in and out of favor which is what creates investment opportunity for those who can do the research and have patience.
While it is near to impossible to know if the market is correcting in real time, what we can do is stick to the plan and refrain from jumping off the train while it is still moving. Over the long-term, the stock market has trended upwards after recovering from other economic crises and global recessions. When the markets are at their most unpredictable, like the past few months, it pays to stay invested.
If you are still asking yourself if now is a good time to invest please contact us! We would love to discuss your financial situation in more detail and help design a plan to help you move forward.
