As the coronavirus continues to contribute to stock market volatility, the best financial defense is a disciplined savings and investment strategy. This is true of coronavirus as well as any situation with the potential for significant financial impact.
Be prepared with an emergency fund
First, make sure you have enough personal savings to carry you through a short-term emergency. The size of your emergency fund may be from a few weeks to a few months’ worth of your income depending on your circumstances. Ask yourself: ‘If I missed a paycheck, do I have enough savings to pay my regular bills on time?’ For many, this can be the most difficult component of their financial security to achieve. However, small changes in your spending habits can lead to big savings over time.
Remain disciplined with your investment approach
From an investment perspective, having the proper asset allocation (or mix of stocks, bonds and cash) is critical to long-term investment success. Generally, the younger you are, the more risk you can take because of the longer time horizon you have. As you approach retirement, your asset allocation to the stock market is usually more modest, but is rarely, if ever, close to zero. Stocks can be volatile, as we have recently seen, but they also provide for growth and inflation protection that is critical to preserving your purchasing power as you move into retirement and no longer receive a paycheck.
The other benefit to a disciplined asset allocation strategy is the opportunity to re-balance your portfolio at just the right time. For example, if you are a patient investor with a mix of 60% stocks and 40% bonds, the unusually high stock market returns of 2019 would have pushed your stock allocation up significantly. If you had rebalanced your portfolio at year-end, or even early in 2020, you would have been selling stocks high and buying bonds. Now, if the stock market persists in selling off, your portfolio will be below its 60% target weight for stocks. When you rebalance back to target, you will be selling bonds at higher prices and buying stocks at lower prices. This type of measured, disciplined approach ensures that you are always selling high and buying low. It doesn’t require you to act weekly, or even monthly in response to short-term events. Rebalancing just two or three times per year can keep you on track.
While asset allocation and periodic rebalancing are central to a successful investment program, it still leaves the issue of, ‘Exactly which investments, among the dizzying array of possibilities, to buy?’ There are literally thousands of mutual funds, exchange traded funds and individual stocks to choose from. In addition, there are funds and ETFs tied to indexes, and actively managed funds that try to beat the market. After deciding what to buy, how will you know when it’s time to sell? There is a wealth of information available on the Internet from investment companies and certainly no shortage of well-meaning friends willing to give you advice. Just like medical advice, legal advice or tax advice, there comes a time when it’s best to contact a true professional for investment advice. Doing so now is the best preparation for any financial storm.
Talk to a professional
At Old National, we have experts, probably right in your community, who are ready to provide the investment advice you need. Let us know when we can help you.
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