Should my investing strategy change during COVID-19?
COVID-19 has changed the world and our lives in overwhelming, devastating ways. Even if you were not physically hit by the virus, you have probably been impacted mentally and financially. 7 in 10 adults recently surveyed reported the economy as a significant source of stress. This is on par with the previous stress recorded—reported high of 69%—in America during the recession in 2008. Not surprisingly, the percentage of adults who cited the economy as a stressor during 2019 was significantly lower at 46%. Similarly, 7 in 10 employed adults (70%) say work is a significant source of stress in their lives.
These stressors, combined with the panic-inducing headlines in the media, might make you wonder if you should be changing what you’re doing with your money. Even if you’re aware of the fundamentals of the stock market and investing, it’s clear now that no one can predict what’s going to happen with the market.
If there’s one rule of investing that still applies during these times, it’s this: don’t panic. There may be sound logical reasoning behind changing up your investment strategy (we’ll go over some reasons below). Generally, investors should focus on their long-term goals, ensure they are well diversified across asset classes and industries, and be consistent as much as possible.
Reasons for changing your investment strategy
That said, there are a few reasons why it might be prudent for you to change part of your investment strategy:
Your risk tolerance changed: Your risk tolerance is your willingness and ability to take on risk in your portfolio. There are two components to this:
Your willingness: During the last 10 years—the longest bull market in history—it was easy for investors to overestimate their risk tolerance. If thoughts of your portfolio are keeping you up at night or you liquidated some of your equity earlier this year, you might have overestimated your willingness to take on risk. This means that you need to include a percentage of lower risk asset types in your portfolio like bonds, CDs, or money market funds
Your ability: if you had to take a pay cut to keep your job or think your job is not as safe as it was a few months ago, your ability to take on more risk might be impacted. The solution would be the same as above—ensuring that you have a good percentage of your money in liquid, low-risk assets.
You are going to need cash in the short term, or you don’t have a sufficient emergency fund in cash
You are not diversified enough: in a bull market, it was easy to justify putting 90-100% of your investable assets into the stock market. The pandemic was a wake-up call for individuals who invested their emergency cash or down payment funds. Another note here: if you are heavily invested in one company, it’s time to diversify and rebalance your portfolio. Most people don’t realize how monopolistic their investments are (maybe they get company stock as a part of their compensation or perhaps bought shares of a company right before it shot up). Look into index funds or other diversifiable investments to rebalance your equity.
Reasons why you should not change your investment strategy
If you are in the market for the long term (such as when you’re saving for retirement), have diversified your assets in varying asset types, and can stomach the level of volatility in the market right now, then the best move for you would be to change nothing. If you’re contributing to your 401(k) at work, keep doing so. If you’re in the process of saving for your retirement fund in a high yield savings account, don’t pivot and buy tech stocks. If you contribute $200 a paycheck into an ETF, don’t cancel your future transfers.
Remember, there are no quick money-making schemes in the investment world. In the last few months, “experts” have been wrong more often than right, and day-trading has become the preferred sport. But because you are investing for the long term, it doesn’t matter that Warren Buffet sold all his airline stocks or which specific pharma company will come up with the COVID-19 vaccine. The best move is to stay in line with your original plan.
We know, that sounds so boring. That is the reason you don’t hear this advice much in popular media—doing nothing doesn’t make any money for most of the financial industry. By buying and selling frequently, especially if your platform charges you commissions, all you’re doing is giving away more money in fees and potentially triggering a tax event for yourself.
Steps you can take to safeguard your portfolio
Even if you don’t change your investing strategy, make sure you are minimizing your risk by doing the following:
Continue making your regular contributions: If you have been regularly contributing to your retirement plan, you are taking advantage of a concept called dollar cost averaging. By spreading your investments over a period of time, you are reducing the impact of volatility on your portfolio
Rebalance: If you have a DIY approach to your portfolio, remember to rebalance periodically so that you are not unknowingly taking on more risk. With the rise of tech stocks in this pandemic, it can also be a good idea to confirm that you are diversified across sectors along with asset types.
Stop loss orders: A stop-loss order is an order you can place with your investment broker to sell a specific stock once the stock reaches a certain price. A stop-loss is designed to limit an investor’s loss on a security position. If you’re heavily invested in one company or stock and have carefully considered the lowest price you’d be willing to own the security at, consider placing stop-loss orders with your broker.
Maybe you’ve been reading the headlines and wondering if you should change your investing strategy. While there’s a lot of speculation, the reality is we just don’t know what’s ahead. Here’s a good test if you’re wondering if you should change your investment strategy during the pandemic: if there has been an intrinsic change in your mentality or a change in your personal circumstances (like if you realized you were too heavily invested in stocks for your age or are in the danger of losing your job in the next year), this can be a good time to rethink your portfolio.
If, however, you are worried because of the headlines or are trying to copy someone else’s actions in the market, you should stay the course. Your portfolio should not be an added stressor for you during these times —it’s best to set it to what works for your long-term goals and then stay true to the plan.
Sign up for investment updates, articles, & exclusive offers