One of the longest bull markets in the US history came to an end amid the COVID-19 outbreak. The S&P 500 index has declined around 25% in the last one month. There have been more than 125,000 confirmed coronavirus cases and 4,600 deaths worldwide. No one knows how long it will take to contain the coronavirus outbreak or where the markets would go from here. If you are worried about losing more of your money, here are a few things you can do to protect your money or minimize the losses during the current market downturn.
Protect your money in a downturn: Tips
1- Don’t sell in panic
Some investors see the market downturn as an opportunity to buy shares of great businesses at lower prices. Others are freaking out on losing a huge portion of their hard-earned money. Uncertain about the future, they worry that the market could go down even further.
Remember that you realize a profit or loss only if you sell your investments. The massive decline you see on your screen means nothing if you don’t sell right now in panic. There are thousands of scientists, regulators, and healthcare experts working relentlessly to contain the coronavirus outbreak. At some point, the virus will be contained and business will be back on track.
ValueWalk's Raul Panganiban interviews Dr. Kathryn Kaminski, Chief Research Strategist at AlphaSimplex, and discuss her approach to investing and the trends she is seeing in regards to quant investing and hedge funds. Q1 2021 hedge fund letters, conferences and more The following is a computer generated transcript and may contain some errors. Interview with AlphaSimplex's Read More
Selling in panic is the worst thing you can do with your equity investments. Just stay calm and sit tight. It’s a good time to catch up with your friends (virtually) and family members.
2- Don’t borrow to invest
Maybe you’ve acquired too much of Internet wisdom. “Buy when there’s blood on the street.” “Be fearful when others are greedy and be greedy when others are fearful.” “Buy the dip.” You know this is a wonderful time to buy stocks at ridiculously low prices.
You can significantly increase your returns if you buy the dip. You check your bank balance, you are a little low on money. But you don’t want to miss this once in a lifetime opportunity. There is nothing wrong in borrowing a little to take advantage of the market situations, right?
Well, there is just one problem. You don’t know if or when the markets will bounce back. You also have no clue whether the market will sink further after you buy. At this point, the only certainty is that you have to repay the debt with interest. John Maynard Keynes once said, “Markets can remain irrational a lot longer than you can remain solvent.” Focus on staying solvent.
3- Don’t use your emergency savings for investing
Using your emergency savings to buy stocks is as terrible an idea as borrowing money for investing. I assume you have enough money in emergency savings to cover at least a few months of expenses. You could lose your job in the current market or your small business could suffer losses as coronavirus forces people to stay indoors. Protect your money.
If you have nothing in emergency savings, start adding cash to the emergency fund right now. It will ensure you aren’t forced to sell stocks or withdraw from the retirement nest egg if there is a temporary setback. It’s never a bad idea to have some extra cash in hand. It enables you to weather the storm without selling your investments.
4- Don’t get adventurous with your career
I just realized this post is turning into a “Don’t” list. Amid the coronavirus outbreak, several large corporations have asked their employees to work from home. Some companies could also see it as a opportunity to trim their workforce.
So, it might not be the best time to switch jobs. If you do want to switch jobs, make sure that the new company’s financials and fundamentals are strong. Excellent businesses can weather the storm. Terrible ones probably can’t. The coronavirus outbreak coupled with an economic downturn is not a good time to find out that the company you work for or just joined is on the verge of shutting down.
If you have some extra time, utilize it well to upgrade your skills and make yourself more valuable. People with in-demand skills, goodwill, and strong relationships are far less likely to lose their jobs.
5- Don’t stop dollar-cost averaging
If you have automated your investments, don’t interrupt it unnecessarily. Stock markets have both positive and negative years. Investing consistently through ups and downs averages out the buying price. This dramatically minimizes the risk of overpaying. Stopping investments in a market downturn such as the current one defeats the whole purpose of dollar-cost averaging.
Dollar-cost averaging is one of the best things you can do to protect your money. It allows you to accumulate more shares when the prices are falling.
6- Cut down non-essential expenses
It’s time to hit the brake on frivolous spending habits. You have no control over the global coronavirus pandemic or the market’s behavior. But you do control your budget. Saving money is almost as good as earning money. It’s an excellent way to protect your money.
Review your budget and see where you can cut the expenses. Maybe it’s time to have only one streaming TV subscription instead of 47? Maybe it’s OK to eat out only twice a month instead of 10 times? And maybe it’s time to buy a refurbished iPhone rather than the latest 2TB iPhone 14 Pro Max Ultra with 14 cameras?
Also, pay special attention to impulsive purchases. There is always some kind of sale on Amazon and other retailers. Unless you really, absolutely need that thing, just skip the sale. The amount you save by cutting expenses can be used to build up your emergency savings.
7- Stay laser focused on long-term goals
When everyone around you is panicking and the TV news is scaring every viewer to death, take a deep breath and calm yourself down. Get things in perspective. In the long run, equity markets have done pretty well. The S&P 500 has delivered an average annual return of 10.47% over all 10-year periods between 1937 and 2019.
Don’t discount the human resilience. The coronavirus outbreak will eventually be contained one way or the other. Business activity and the markets will get back on track. Just stay focused on your long-term goals.
8- Have a diversified portfolio
Diversification is one of the best ways to protect your money. It doesn’t guarantee profit in all market conditions, but it does help minimize the losses. Review your portfolio and ensure that you are not overly invested in any one asset class.
Have a mix of stocks, bonds, gold, and other assets in your portfolio. How much you invest in each of these asset classes depends on your risk tolerance, goals, and time horizon. Rebalance the portfolio from time to time to ensure that it’s in line with your risk tolerance. A well-diversified portfolio can minimize the effects of volatility.
9- If you have idle cash, look for buying opportunities
Very few people like to keep some extra cash at all times. Cash in the bank or liquid funds doesn’t earn as high return as stocks. But having some extra cash (above and beyond your emergency savings) comes handy in a market downturn.
If you are smart or lucky enough to have some cash in the bank, go bargain-hunting. It doesn’t mean you should put all your cash in junk stocks that have declined the most. That’s not how you protect or grow your money. Invest only in businesses with strong fundamentals. Also, don’t invest all the cash in one go. The market could decline even more after you’ve purchased shares. So, take a staggered approach. Invest small amounts over several days, weeks, or months.
10- Renegotiate debt payments
A market downturn brings with itself the risk of job loss. If you have a huge credit card debt, student loan debt, or mortgage and you are feeling the pressure, it’s time to leverage your relationship with the lender and the repayment history.
Don’t hesitate to call the lender, tell them what you are going through, your repayment history, and ask them to make the debt repayment a little easier for you. And do it before your credit score suffers a serious damage. There is a good chance the lender will work out a new repayment plan for you.