The headlines about the toll Covid-19 (aka Coronavirus) will likely take on the US and World economies aren’t comforting. They’re laden with words like “downturn” and “recession.” Despite yesterday’s run-up, last week’s downturn in the markets – for anyone who has a 401(k) or a 529 college savings account, let alone a plain old brokerage account – was enough to set your stomach on edge. And despite the fact that the markets are up today (The DOW was up 1,200 points at last glance) there’s no telling what tomorrow may bring, as news of the virus and the efforts to combat it rage on. So the question is: What do you do?
My take: Ask yourself the following questions.
What is this money for? How you invest your money has everything to do with how long you have before you need to use it. Money you need in the short-term, next few years to pay for college tuition or a downpayment on a house, or living expenses because you’re going to be in retirement, doesn’t belong in stocks. If it’s in there – you should get it out (don’t worry that you lost money last week, you’ve made many times that the last 10 years). But if you don’t need the money for longer – even if you’re retired if it’s not for the next couple of years of living expenses, then you can weather this storm.
When was the last time I rebalanced? The markets have, as I noted, been basically heading straight up since the financial crisis in 2009. That’s a long time. If you picked a mix of stocks and bonds – say you decided you wanted 60% in stocks because that made sense for your age and risk tolerance – a decade ago and haven’t changed it, you’ve got much more than that in stocks now just because of how the markets have moved. And you’re a decade older (and we should generally take less risk as we age.) Go ahead and fix your investment mix. The caveat: If your money is in a target date retirement fund, it’s been doing this for you. Whew.
Is my MUG covered? For people who are looking at retirement and trying to figure out how much money to leave in stocks and how much to move to safety, one helpful tip is to look at whether you have enough income (with social security, any pensions) to cover your most important expenses – mug stands for Mortgage, Utilities and Groceries – and you may want to add healthcare, transportation and your cellphone to that list. If not, you may want to convert a chunk of retirement money to a lifetime paycheck that will get you there using a simple annuity. And if you’re not sure if you’re covered, there’s a simple test at retireyourrisk.org that you can take to find out.
Have I taken a look at my mortgage lately? If your credit is good and you haven’t refinanced since, say, mid-2018 (or since you’ve substantially improved your credit score or debt-to-income ratio) you’ve got a shot at substantial savings. Rates were at 8-year lows last week, and look poised to continue to fall. The Federal Reserve cut interest rates by a half of a percent on Tuesday morning in an effort to combat the coronavirus-caused dip the markets took last week. Granted, there is a cost to refinancing (generally about 2% of the purchase price) but if you’re going to be in the home long enough to make up the cost of the deal and then some, it is absolutely worth a look.
How am I sleeping? The point of all the money you’re socking away for retirement and college and your other financial goals is to set you up for a life in which you are stressing less, not more. If the current levels of volatility are more than you can take, then by all means take a little risk off the table by reducing your stake in stocks by 5 percent. If that doesn’t work, try another 5 percent. (Getting a professional opinion is also a good idea.) What you don’t want to do is sell everything and then not have the stomach to get back in. Waiting in the sidelines is how too many people missed the last 10 years in the market. Even if the last week or so has been painful, you should still be glad you’re not one of them.
- HerMoney Podcast Episode 180: Are You Recession-Proof?
- Is There Another Recession Coming? Here’s How To Manage
- Coronavirus Causes A Long-Overdue Market Plunge
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