Personal Finance

Investing in a new normal

Photo of stock charts on laptop sitting on a counter

    If it seems like you’ve been on a financial rollercoaster this year, you’re not alone. 2020 has brought a sudden shift in financial challenges across the country. The stock market has been unpredictable, families are tapping into emergency and savings funds are and people are concerned about their investments for the rest of the year and beyond.

    But what’s the right next step? The answer depends on your risk tolerance, though there are a number of financial moves that can put you in a good place, or at least help you weather the storm.

    Remember, any kind of investment carries risk. Don’t spend anything you can’t afford to lose completely. Additionally, historical performance is not indicative of what may happen in the future.  

    What to do with the stock market?
    The classic investing adage is to buy low and sell high. Of course, trying to time the market works better in theory than in practice. And that was under pre-pandemic circumstances. In our new normal, trying to time the market will drive you crazy and likely lead to a lot of financial frustration.

    Take Wayfair, for example. The online marketplace offers home essentials like furniture, lighting, cooking and other decor. Its stock performance over 2020 has been an absolute whirlwind. In the span of two months, it dropped more than 80 percent. The two months after that? It rose 780 percent. 

    This chart highlights why trying to time the market rarely works. There’s just too much volatility and unpredictability. You also never know for sure that something will return to the level it once was at. Warren Buffett sold off all his airline stock at a loss, as he believes the travel industry will be severely impacted for the long term.  

    If you do want to invest in the market, look at companies that have long-standing track records of success and who are positioned well even in uncertain, remote times. For individual companies, that means ones with reliable cash flow, strong yields to play dividends and large market capitalizations. Buying a dip—even if a stock is not at its lowest point—is better than nothing. An even safer move is to look at index funds instead of stocks for individual companies. That way, you get exposure to multiple companies across the entire economy. 

    Leave the retirement portfolio alone
    During an economic downturn, it can be tempting to look at a 401(k) or Roth IRA account as a quick source of money. But that quick fix can cause more harm than good down the road, and could be rife with fees, depending on the type of account and your age.

    Tracy Burke, a certified financial planner with Conrad Siegel, suggests looking at your 401(k) balance just once per quarter. Like the stock market, retirement funds can undergo volatility. Watching a fund dip could trigger a quick reaction you may later regret.

    Instead, Burke encourages contributing even more to your retirement fund, especially if your employer continues to match your contribution. Even a one or two percent match can grow into thousands of dollars over time.

    Generally, a good rule of thumb is to put 15 percent of your income into a retirement fund. However, in tougher times, that may not be possible. If you truly can’t contribute to a retirement fund right now, be sure to set a reminder three or four months down the road. You can reassess the situation and start your contributions back up.

    Don’t be afraid to use your emergency fund
    An emergency fund is a stash of money to save for one of life’s unexpected financial surprises. Things like losing a job, needing to buy a new car and medical expenses can all necessitate an influx of money. Sometimes, multiple life events hit at once.

    Before 2020, most financial pundits recommended keeping three to six months’ worth of living expenses in cash. Now, Ramit Sethi, financial expert and author of the book I Will Teach You to Be Rich, encourages bumping that up to a full year. He recommends calculating your bare minimum expenses for a month, eliminating non-essential recurring costs (think Netflix, Spotify, or to-go coffee orders) and multiplying that sum by 12. That’s the total you should strive for with your emergency fund.

    Sethi recently shared a video where he said people are writing to him, saying they don’t want to dip into their emergency funds. His response?

    “What is an emergency fund for? This is an emergency … Panic is bad, but overreaction is good. It’s time to think about your emergency fund because we have an emergency situation.” 

    If you don’t have an emergency fund, it’s not too late to start. A money market fund can be a good place for emergency savings because of how accessible and secure it is, though you could also open up a separate savings account. That money will earn a bit of interest over time, which only increases every time you contribute to your fund.

    Other areas to consider
    Are your emergency funds and retirement portfolios in good places? Not interested in investing in the stock market? Or maybe you’ve already got some money in the market and want to explore some other opportunities. Here are a few other areas to consider:

    • Real estate: Real Estate Investment Trusts, or REITs, are a great way to dip your toes into real estate investing without actually having to find a property to sell. A site like Fundrise invests in commercial real estate across the country, then offers investors exposure to those investments through REITs.
    • Small business: COVID-19 has negatively impacted a lot of businesses, but there’s reason for hope. Cities want their local businesses to succeed and are supporting them however they can, and in some cases, a business can sell almost entirely online. Crowdfunding has grown in popularity over the past few years, with sites like NextSeed and WeFunder offering the opportunity to invest in small businesses. Companies can structure deals as loans, revenue shares, stock options or convertible notes, giving lots of variety to potential investors. 
    • Music: Not everyone is a musician, but that doesn’t mean you can’t make money from songs. Online marketplaces like Royalty Exchange feature tracks and albums from musicians across the world. There are some big names, too – recent sales include works from the catalogs of Rihanna, Evanescence, and Charlie Wilson. Investors can bid on different types of music rights, such as the mechanical licenses of musical compositions or public performances of sound recordings. 
    • Yourself: This isn’t just an inspirational message. It’s a business savvy one, too. Whether you design an online course to teach your area of expertise to others, share your thoughts with the world, or even simply browse the Internet, investing time in yourself can pay major dividends.

     

    Again, there are risks to any investment, so be sure to only invest money you can afford to lose. However, if you understand the prospects involved, there are multiple opportunities out there. Many of these options are longer-term plays, but they offer potential for strong growth.  

    The ZebraResource Center