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Investing in the COVID-19 era

Individuals 07.01.2020 4 MIN READ

Despite unprecedented changes in our society and market volatility brought by the COVID-19 pandemic, there are things you can do to protect yourself and your investments.

Investing is generally critical to helping you meet your financial goals. Especially in times of market volatility, it’s important to carefully review your investing strategy. The choices you make today could have a major impact on your future finances.

Understand your comfort with risk

When it comes to investing, one of the first things you have to acknowledge is that there are ups and downs in the market, even in relatively stable times. When markets are more volatile, swings can be more drastic and you can either make—or lose—a lot on your investments in a short period of time.

Understanding the level of risk you are comfortable with is critical to determining your investment strategy. Factors that influence your risk tolerance include:

  • Savings/Investment goals—Will your savings goals require you to spend your savings down over a shorter or longer period of time?
  • Time horizon—How quickly do you need to be able to access your money? How long can you leave your money invested?
  • Your personality—Will you become anxious if you experience losses? Are you willing to wait out periods of market volatility?
  • Future financial expectations—Do you expect your annual income to increase, remain the same or decrease? Will you be losing a source of income (e.g., due to retirement)?
  • Concern about market fluctuations—How easily can you replace lost investments? Can you weather fluctuations?

Your comfort with investment risk depends on your financial priorities and goals. If you’re close to retirement and will need to access your funds relatively soon, you may become more risk averse. If this is the case, you may consider adjusting your portfolio to lower levels of risk, or even cashing out on some investments. If you’re far from retirement or other expensive savings goals, and have excess income (funds leftover after living expenses are paid), you may have a higher threshold for risk. In this case, you might lean into riskier investments that could pay much higher returns.

Diversification is key

Smart investing involves diversifying your portfolio because different investment vehicles react differently to changes in the market. Investment-grade bonds, which provide lower returns in exchange for a lower level of risk, tend to be a steadier investment. When the market is doing well, stocks and other riskier investments may provide higher returns.

By introducing variety to your holdings, you can set yourself up to weather uncertainty. This balancing act can provide a buffer for riskier investments at any given time.

You can diversify your portfolio:

  1. By asset types. You could choose to hold a mix of stocks, bonds and other investment vehicles. As discussed above, these assets react differently in the market and can balance each other out.
  2. Within asset classes. If you are investing in stocks, you could select stocks from different types of companies (e.g., small vs. large, domestic vs. international, etc.). If you are investing in bonds, you could select a variety (e.g., government, corporate, asset-backed, etc.).
  3. Over time. If you decide to make changes to your portfolio, you don’t have to make changes all at once. You can make changes periodically through dollar-cost-averaging or you can use future investments to change the overall allocation.

Diversification can also help you avoid the temptation to try to time the market, when staying invested is generally the best course of action. Timing the market involves trying to buy stocks when prices are at their lowest and selling when they peak—which is no easy task, even for professionals.

Want to learn more?

Our Investing in uncertain times webinar takes a deep dive into the specifics of the current market environment, including S&P 500 performance currently and historically, returns on different investment types in 2020, growth and volatility in the market and more.

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