Financial Lessons From The Pandemic
For many investors, the disruption in the global financial markets from the COVID-19 pandemic came as a shocking surprise.
At the start of the year, Wall Street was enjoying one of the longest bull markets in history. Bonds were also performing well, along with real estate and other types of assets.
But in March the rising worldwide death toll prompted an unprecedented public health response that included sheltering in place, minimizing unnecessary travel, and wearing face masks when out in public. As the travel, hospitality and retails sectors collapsed, unemployment reached levels not seen since the 1930s.
As a result, most investment portfolios took a big hit, depending on the degree of diversification. While diversification does not guarantee a profit or protect against loss in a declining financial market, if you had focused primarily on the stock market, the balance in your portfolio may have plummeted more than if you had diversified your portfolio with different types of assets.
One financial lesson from the pandemic has been the importance of liquidity. If your income was suddenly cut off, did you have enough funds available to pay your ongoing household expenses? Or did you have to take more drastic steps, like selling stocks at a loss, in order to keep paying the bills?
Diversifying your assets and maintaining a rainy-day fund are prudent steps for long-term investors. Here are some other important lessons to consider as the world’s economies gradually try to regain their bearings.
- Stay focused on your long-term goals. Unless you need to sell your assets now, you don’t have to unload your stocks or bonds at a loss. Historically, the markets have recovered from these types of downturns, although it may take many months or several years.
- Don’t try to time the markets. No one has a crystal ball to foresee the future. Stocks could go up, down or remain flat for the rest of the year, and it’s risky to make a big bet on which direction they will go.
- Look for buying opportunities. A downturn in the financial markets can make investments more affordable. Industries that are struggling to stay afloat could make a comeback, potentially creating nice returns for investors willing to accept the risks. The same principle applies to real estate, oil and gas, infrastructure assets like toll roads, and other types of alternative assets where appropriate.
- Try not to pay attention to the daily headlines. This year, the U.S. financial markets have been highly volatile, jumping up and down based on the latest COVID-19 developments. It’s emotionally draining to keep pace, so tune down the noise.
- Be courageous. Don’t let fear overcome your judgment when making investment decisions. Selling stocks at a loss because you’re worried about the future could unbalance your portfolio, leaving little upside potential if the markets rebound.
- Understand your true risk tolerance. Living through the past few months may have lessened your appetite to invest in stocks or other volatile assets. If so, you should talk with your financial advisor and consider doing some rebalancing of your portfolio.
- Update your monthly household budget. Almost everyone’s spending habits have changed this year. You may be doing more cooking, rather than dining out and shopping online rather than going to a mall to browse the stores. Think about how these changes have affected your budget, as well as your quality of life, and decide how to put your dollars to best use.
- Build up your savings. The pandemic created a financial emergency for millions of Americans living from paycheck to paycheck. Once your income stream returns, be sure to start set aside money and build up a nest egg to avoid such a crisis in the future.
- Don’t neglect your estate planning. Concerns about health, coupled with uncertainties in the world economies have led many people to prepare a will and medical directives, or review their current estate plans. Along with providing for your family members, you should consider making arrangements for your own care if you become seriously ill.
Finally, talk with an experienced financial advisor about your goals, your hopes and your concerns about the uncertainties of the future.
Source: Miami Herald