Market Turn

Investors are used to downturns, but the sudden, sharp market crash seen during the coronavirus is another story. It only took the market a little over a month — Feb. 19 to March 23 — to tank 35 percent, whereas downturns in the dot-com bubble burst and Great Recession, albeit worse, took two years and 18 months respectively.

Just as jarring as the swift drop was the speedy recovery it made. “The market has been recovering almost to a surprising degree, so that as of today [mid August], we’re sitting down about 1 percent from the peak in the stock market,” says Dan Garner, a financial adviser at Presper Financial Architects. “We’ve made up almost all that downturn, which doesn’t quite seem possible with the virus. Clients are kind of surprised.”

These rampant ups and downs have many people concerned about their investments, but Garner cautions to not make hurried moves. “Let things recover because we know once it’s already down — as painful as it may be — riding the wave back up is the best course of action most of the time,” he says. “Over a long period, the stock market has shown it always moves forward in the end.”

Through these uncertain times, Garner advises how to manage your investments with the future in mind.

Bank what you need to sleep soundly. Invest what’s left.

People are usually most panicked about having enough cash on hand. Before reviewing your investments, make sure you look at your financial plan as a whole and feel comfortable with the amount in your bank accounts that’s accessible if you need emergency withdrawals.

“We wanna make sure our clients have enough in bank accounts on the sidelines that they aren’t losing sleep,” Garner says. 

As a general guideline, keep three to six months of expenses in bank accounts, which don’t typically earn much interest, and invest the rest, he advises. Determine that amount by adding up expenses including health care, mortgages, travel, discretionary spending and more.

Put the remainder in investments for an opportunity to grow your money, and make sure you choose different types of stocks and bonds. Having a diverse mix of investments, which may include U.S. and international stock mutual funds, exchange-traded funds, individual stocks and short-term bonds, means you aren’t overexposed to risk in any one area. 

When it comes to how much you invest in different types, it depends on your risk level (see “Money Tree” sidebar). Bold growth-oriented investors might put the majority of their funds in stocks that are riskier and less in safer options like bonds, while those who are conservative might put the least in stocks and the most in safer options. The amount of risk you take on often lowers with age.

“For younger clients in times like this, our advice would be stay growth-oriented. Just let it weather the ups and downs,” Garner says. “But as someone approaches retirement, often there’s a need to reduce risk, and that’s what we do along the way.”

Buy low, sell high.

W

hen it comes to stocks, the old adage of buying low and selling high is still the goal. Each stock you buy is a small share of a company, and you make money when the stock price goes up and lose money when the stock price goes down.Garner says if you sell stocks low because you’re nervous, buying back in could be expensive and derail your financial plan. 

When selecting stocks, think past how the company is doing now. Doing your research to ensure the company is in good standing pays off. “A good thing to look into is how much a company has on the sidelines,” Garner says, “because when things get bad, the companies that have a lot of debt tend to be hit the hardest.”

Garner advises looking beyond hot big-tech stocks like Amazon and Apple. “They’ve been making a ton of growth, which is great, but they’d be considered slightly overvalued,” he says. “We look for stocks that might be a little more undervalued, that may have room to grow.” When a stock’s share price is below its true value, it’s low to buy in, and then when its price rises toward its true worth, you could make a profit. 

Examples of undervalued stocks are dividend-paying stocks for communication or utility companies like AT&T and ExxonMobil. These regularly make payments to shareholders. “That’s gonna be stocks that pay out a good income. They might be considered more stable,” he says.

How much you make correlates to how much money you invest. For example, a risk-oriented client with about 80 percent in the stock market could see 8 to 10 percent in returns over a long period. 

Make money in stocks. Keep money in bonds.

Stocks are used to grow your money, but bonds keep your money in a safer spot with some growth. For example, a short-term bond has lower risk and might yield a 1.5 percent return. That is why worried investors are gravitating toward bonds now.

“We generally move to bonds when people get nervous, and we would move out of bonds when people request that we increase their stock position or increased risk,” Garner explains. “Bonds — we want that consistent, stable return.”

When you buy a bond, the government entity or company is in debt to you and pays interest to you. The value of bonds is tied to interest, so when interest rates are low, bond values move up, and when interest rates are high, bond values move down. 

You want to be more conservative in a volatile climate because bond issuers could default. “We don’t necessarily wanna be taking on a lot of extra risk at this point in time, so we stick with high-rated companies for corporate bonds,” Garner says, “as opposed to high-yield bonds which are gonna have a bit more risk [now].”

Corporate bonds usually offer higher interest rates, which means higher payments to you. U.S. Treasury bonds are the safest bonds you can get. They have lower interest rates and are backed in full faith by the government. 

Your bonds, along with stocks, sit in your brokerage account that allows for withdrawals. You only have to pay capital gains tax upon withdrawal, which is 15 percent if your income is over $100,000 for married couples or $50,000 for single people or 20 percent for couples who make over $496,000 or single people who make over $441,000. 

“We wanna make sure we have enough bonds in their portfolio that they would be able to live off of for a couple of years while the stock market recovered from a downturn,” Garner says. “When stocks are moving up, as people need money, we take it from stocks, but when things are down, that bond portion acts as our protection, ‘cause usually bonds make just a bit of money or are close to flat when stocks go down.”

Long-term, you can use other assets to grow your money, like individual retirement accounts or 401(k)s, but be aware of taxes and penalties. A Roth IRA is strongly encouraged. The money you put in can be pulled out at any time, but you can only start withdrawing the growth penalty-free after the account has been open for five years or you are 59 ½. You pay taxes on contributions upfront, but if you wait until that age, your payments come out tax-free. With a traditional IRA, you deduct contributions from your taxes, but when you take it out, every dollar is taxable, including growth. Since 401(k) contributions are done through your paycheck, you have caps and less flexibility in changing your contribution amount. You can’t withdraw without paying a penalty until age 59 1/2. 

Focus on the long-term.

Everyone is experiencing this recession differently, but do what’s needed to stay on track with your goals.

For those who have lost their jobs, been furloughed or seen cutbacks at work — several of Garner’s clients have reported their 401(k) matches were cut by employers — the best thing to do is meet with a financial adviser and determine how to make up for losses. That could mean changing the age you retire, adjusting your budget to cut back discretionary spending or raising your personal 401(k) contributions. These options are all first choices over withdrawing investments and losing money or paying a large fee. 

On the other hand, if your cash flow is stable and you have extra money from canceled vacations, restaurant outings or events, consider slowly directing extra funds toward investments. Calculated adjustments are key to getting through this recession, and remember, any bit you invest could be the security you need later. 

“Make sure you have enough cash on the sidelines and in bonds to protect yourself for a while, but for the stock piece, let it come back,” Garner says. “Look at saving what you’re not spending. You’re investing it in your future.”