How the Coronavirus Impacts Your InvestmentsSubmitted by Korhorn Financial Group, Inc. on March 4th, 2020
Should the coronavirus and the sudden drop in the stock market change what you’re doing with your money? Well, it depends on how you answer these three questions.
The stock market is reacting like the coronavirus is the next black plague…is that justified? Whether it is or isn’t, the market is moving and the inevitable question is on your mind again: do you need to make changes with your money because of this?
It is certainly scary! Movies have made millions of dollars dramatizing the next viral pandemic, and with so much still unknown about the coronavirus, how it’s spreading, how to treat it, it’s fairly reasonable that it’s already having an impact on the economy. Does this push us into the next recession or a global recession? Still, it’s impossible to know, but for steps on how to prepare for the next recession, whether this is it or not, check out this video.
But for now, with the stock market having such a sudden reaction, should you make changes with your investments because of the coronavirus? That depends on how you answer these 3 questions.
First, do you plan on withdrawing money from your investments in the next three years or so? If your answer is yes, that money should be low risk, something safe. This isn’t a prediction of the spread of the coronavirus and its impact on the stock market, and this isn’t market timing either. This is a prudent investment philosophy. The money you need in the short term should be invested for the short term, meaning not in high risk. Especially with how well the stock market has performed the past several years, many investors have avoided this principle and kept the money that they need in the short term invested more aggressively. Don’t make this mistake! If you are drawing money out of your investments then the money you need in the short term should be low risk.
As a quick example, say you are in retirement or are planning on retiring soon, and will need to draw $3k a month from your investments to supplement your Social Security. You should have about $100k within your investment account in low-risk investments, either a Money Market or other low-risk tool. You should then probably have another $100k to $200k in a moderate or medium investment mix of income-producing investments which is the money you’ll spend from say 3-10 years.
If you have this approach to your investment strategy, you have a moat around your financial house, which gives plenty of time for your long-term investments to go up and down and hopefully recover from any short term volatility we’re seeing from the coronavirus before you’d need to live on them.
So that’s paramount, if you have short term money that’s invested for the long term, that’s a change you need to make.
The second question is are your investments properly diversified? If they aren’t then you need to make a change. I’m not going to belabor this point because we all know the benefits of diversification, not having all of your eggs in one basket. But the truth is diversification is hard to stick to because over time we look at our baskets and see that some are doing better than others. We want to start taking some eggs out of what seems like “bad” baskets and moving those eggs to the ones that have done better.
There is no question this has been happening: why would you want to own bonds when stocks have been performing so well? Stay diversified. This is when that discipline is needed the most. Will diversification between US and International, or Large and Small cap stocks help? I don’t know, and I think it depends on how the coronavirus plays out, but mathematically diversification, especially mixing stocks and bonds and other investments, helps manage risk better than being concentrated in one or two investment areas.
One additional point on diversification is the benefits of rebalancing. This is where every so often you snap your investments back to their original recipe, selling a little of what’s done well and buying what’s done poorly. If you haven’t done this recently then you need to, and I would encourage you to set up automatic rebalancing in your 401(k) or with your financial planner so that this rebalancing happens like clockwork no matter what happens with the market in the future.
Finally, the third question as to whether you need to make changes in your investments due to the coronavirus is; do you have a momentum strategy as part of your investment approach?
If you have your short term money in safe investments, and if you’re properly diversified for your financial plan, then the final question is should any of your investments pivot right now based on momentum swings in the market?
If you’re doing this based on emotion, I would tell you not to, because it requires a system to do this well. Right now, if you make a decision to sell your long-term investments, what needs to happen for you to buy back in? That answer is that you’ll buy back in when things are better and the truth is that’s the wrong time to buy back in. You have to buy back in when you don’t want to. When things are the ugliest and everyone is saying it’s going to get worse. And without a system…you won’t do that.
So if you’re tempted to make some changes with your long-term investments, then you need to have a momentum strategy as part of it, not all, but part of your long-term investment portfolio. This momentum strategy isn’t trying to time the market or predict where it’s going to go…that’s impossible, just like it’s impossible today to predict how the coronavirus will actually run its course. But instead, a momentum strategy is going to make quick reactions to how the market is moving…it’s a sell discipline and a buy discipline, and takes the emotion out of it.
If you are using a momentum strategy then it likely is already pivoting to safer investments, like ours is, which compliments the rest of your long-term investment approach.
So there you have it, do you need to make changes in your investments due to the coronavirus? Answer those three questions to know what steps to take. Chances are if you’re not doing comprehensive financial planning then you likely do have some changes to make. And really that’s the fourth question, which leads to you always having the right answer to those first three questions, and that is "Am I doing comprehensive financial planning with a certified financial planner?" If you are then all six areas of your financial life are integrated together so that they have one plan, to help you reach your goals, and from that, I’m confident you have your short-term money positioned appropriately, that you have the right level of diversification and are automatically rebalancing, and that you have a momentum strategy in your long-term investments if you should. So that might be the first wise step you need to make in light of everything that’s going on.
Leave your questions and comments below, need some help answering these questions then reach out to us, and share this video with others as I know just about everyone is wondering what they should be doing with their money right now.
Alright, until next time, my name is Mike Bernard, now go out and take your next wise step in your financial life.