Coronavirus and the market plunge: 5 things you can do right now
The market is running scared of the coronavirus. From last Friday’s close through Thursday, the S&P 500 has dropped a stunning 10.7 percent, while the Dow Jones Industrial Average has fallen 11.1 percent. The moves have hammered 401(k) accounts, IRAs and regular investment accounts alike.
Long-term investors may see this as a bump in the road, but it’s hard to stay focused when the market is falling so far and so fast. If you’re sweating the market’s drop, here’s what you can do.
1. Keep perspective
“Despite a 12 percent decline since the S&P 500 peaked on February 19, what we’ve seen is a correction, not a crash,” says Greg McBride, CFA, Bankrate chief financial analyst. “This brings the market back to where it was in mid-October, just four and a half months ago.”
The market’s drop feels dangerous, and it’s moved into what experts call a “correction,” or when stocks drop more than 10 percent from their last high. A correction usually happens every few years and sometimes moves on to become a bear market, when stocks fall 20 percent or more from a recent high. Bear markets are more typical during a recession, when unemployment rises.
But the economy is performing well generally, with unemployment near 50-year lows. While a recession will arrive sometime, no one knows when. For now, some investors are expecting or at least fearing that the coronavirus will dent economic growth.
“Markets move sharply when fear and uncertainty are prevalent, and there is plenty of both right now,” says McBride. “But investors should maintain a long-term focus and refrain from making decisions with long-term financial ramifications based on short-term volatility.”
And while the market’s fall has been swift, it’s been much worse before. In the infamous Black Monday crash of 1987, the Dow Jones fell a jaw-dropping 22.6 percent in a single day. It may be cold comfort for today’s losses, but we’ve seen worse.
2. Continue buying
It’s truly said: The stock market is the only market where the goods go on sale but everyone is too afraid to buy. The best time to set up great long-term returns is when the market’s on sale.
Investors who continued to hold through the 1987 crash saw almost all of their losses erased just a year later. Those who bought in the crash or the aftermath did even better, because they bought on sale.
The stock market remains the best long-term option for building wealth, because it offers you the chance to buy a stake in some of the world’s best companies and then enjoy their ability to grow earnings for years, if not decades.
Over time, the S&P 500 has returned about 10 percent annually for investors who held on. That level of return comes at the cost of enduring volatility, the rapid fluctuation of stocks that occurs sometimes. But if you can maintain your long-term perspective and you have decades before retirement, it might be a good opportunity to buy or continue buying.
“Friday is payday for many Americans. This week’s 401(k) contribution will get you a ‘sale price’ instead of the ‘full price’ retirement savers were paying just one paycheck ago,” says McBride.
Those with retirement a decade or more away can keep their contributions to retirement accounts flowing, and then check back from time to time without fretting too much over it.
3. Move some assets to emergency cash
If you just can’t handle the volatility of the stock market or you need cash in the short term, you might consider moving some of your money into an insured account such as a high-yield CD or high-yield savings account.
“Economic uncertainty is a reminder to pad your emergency savings just in case,” says McBride. “If you feel the need to do something, do that. But leave the retirement account alone.”
The market’s volatility can drive many people wild, and it’s one reason that experts recommend investing in stocks only if you can stay invested at least three to five years – which is perfect for your long-term retirement accounts. That time frame allows you to ride out swings like this one.
Money that you need in the less than a few years can be invested in safer, less volatile assets such as bonds, CDs or savings accounts. This way you have access to the money when you need it and don’t have to rely on the market to be in a good mood when you need money.
4. Reassess your retirement portfolio
While we haven’t hit a recession yet, we will sometime, and this market drop should offer you a reminder that the great returns of the past decade won’t continue forever. Stocks do go down, and if you’re nearing retirement, you might want to consider how your portfolio is allocated.
Experts often recommend as you near retirement that your portfolio hold more bonds, which provide a steady and less volatile return than stocks. Bonds generate interest income and tend to fluctuate a lot less, though they are not guaranteed against loss either. The closer you get to retirement, the greater your allocation to bonds, say financial planners.
But don’t forget that retirement can last a long time these days. While bonds may feel like the safer alternative now, it’s still important to have some growth in your portfolio using stocks so that you don’t outlive your assets.
Because of the complexities of these issues, some investors turn to target date funds, which manage how much you have in stocks and bonds as you near retirement. It can also be worthwhile to speak with a fee-only financial planner, who can help you manage your own personal situation, craft a plan that meets your needs and help you stick to it.
5. Stay calm and figure out the next right move
You won’t do yourself any financial favors by acting emotionally at a time like this. Unfortunately, that’s what almost everyone seems to want you to do – act first and ask questions later. In times like this, it’s more important than ever to make moves that are in your long-term best interest.
As you consider what to do, think about your own financial needs and what the next right move is. Maybe that next right move is to do nothing and hold on. Maybe it’s to buy more, because you have a long-term perspective and plenty of emergency cash already. Perhaps this drop is a wake-up call that you have too much in stocks when you really need the cash in the short term.
Whether you invest more in the market, move some of your funds to emergency cash or sell it all, you want to make the decision with a level head and understand the long-term costs of each choice. The potential to make or lose money makes this task even more difficult.
A quick and deep drop like we’ve seen recently in the market can really test investors’ nerves, but it’s useful to stick to the kinds of investing principles that have worked consistently in the past. Buy a broadly diversified collection of great companies such as the S&P 500 index using cash you don’t need in the next few years, add to it regularly and hold on for the long term.