First, just let me put a disclaimer out there that I am not a CFP and cannot offer your investment advice or help you pick the next hot stock, realign your allocation, etc. However, I can give you advice on how to handle your finances as a whole during a stock market dip.
Now that that’s out of the way, let’s talk about how the world is in full blown panic mode right now about the coronavirus. The disease is very serious if you are someone who is immunocompromised. For those who are not, like myself and many of those in my family, we all need to take care of ourselves anyway not just to prevent ourselves from getting sick, but to help protect those that are immunocompromised. Herd mentality matters. Wash your hands and don’t go out if you feel ill. If you feel fine, offer to go out and get any items that those who do have to stay away from crowds may need, like toilet paper if you can find it.
Coronavirus Hits the Stock Market
Since this pandemic began, there have been 2 days where the traders had to halt the markets for 15 minutes just to keep it from dropping too fast. Sounds terrifying, right? While COV-19 is definitely a scary thing, this dip in the markets has been long in the making. The coronavirus is just the last straw that broke the bull market’s back.
As of this writing, the markets are down somewhere around 20% from where they were at the mid February high. That is a lot of money, about $3.6 trillion for the total stock market. However, panic selling is the last thing you want to do in this moment. Getting out of the market only realizes the losses you’re seeing on paper right now. What I mean by that is that you do not actually lose the money until the moment you hit sell in your 401K, Roth IRA or other investment account. Once you sell the actual investment, for which I use low fee index funds, then the loss is made real, or realized.
A market correction is a drop in the price of securities, measured at the market level of the two major indexes of the Dow Jones and the Standard & Poor’s 500, of greater than 10%. Per Investopedia, the average correction is ~13% and lasts around 4 months. While 13% can be a lot of money, over the course of your investing timeline, 4 months is a drop in the bucket. Over the last 40 years, there have been approximately 40 market corrections. Many of these have not been memorable at all. The average return in the stock market over the entirety of its existence (1926-today) is approximately 10%, taking away 3% for inflation and you have a 7% return. That’s taking into account that there have been MANY market corrections and bear markets over that time.
To sum it up, market corrections happen. They’re normal and expected. We haven’t had one this drastic in quite some time, but that just means that we were overdue.
What Should I Do With My Money?
This is the loaded question that everyone wants answered. The biggest thing is to change nothing drastically about what you’re doing. Continue to pay off debts, save and invest if you already have money available to do so. Panicking and pulling all of your money out in cash is not productive. If you’re worried that the stock market will go to 0 and you’ll lose everything, don’t. For that to happen, the global economy would have to completely collapse. So, if that were to happen, the rate of return on my investment accounts will be the last thing on my mind and preparing for a zombie apocalypse will be at the forefront.
If you are in the fortunate position to have extra cash to invest, you may be thinking, shouldn’t I just invest a ton of money now while the market is low?
The answer? Possibly, but only if it’s not money that you do not have set aside as part of an emergency fund or prioritized for something else. Taking money from these buckets to invest is not a good idea. Think of your emergency fund as being the hull of your boat and your investments being what has been added to the top deck (mast, sails, etc.). You wouldn’t take the wood from the bottom of your boat to try to build a nicer cabin on the top deck. That would create leaks in your boat and the whole thing goes under. That’s how you should treat investing. Keep your emergency fund built up to keep you afloat and then investments are add-ons to your boat to make it move faster.
Overall, if you have job security, I would recommend continuing to save and invest at your normal levels. If you have any concern about your job, save as much in a savings account (which will not be affected other than your interest rate due to this market correction) for emergencies as you can. As always, keep your sinking funds up to date as well so that you can use your emergency funds for actual emergencies.
Other Important Items
While you shouldn’t go into panic mode, there are still some things to be concerned with and take necessary precautions. Work on socially distancing yourself and your family in order to protect those that are already immunocompromised and stock up on the essentials to allow yourself to do that. Angela from Tread Lightly, Retire Early has a great list on what to stock up on if you have the funds available to do so.
While you are socially distancing yourself, please also take care of yourself both physically and mentally, including things like working out at home. Please follow these instructions in order to properly self quarantine.
Overall, remember this: Don’t panic.
Let me know if you have any questions or advice for myself and other readers in the comments below!