I have been struggling with this question a lot lately… And after a lot of thinking and researching I have realized that this all depends on the individual and their specific position. There are many factors that determine if YOU should invest right now with the Corona virus market drop due to the worldwide virus effect on the economy.
These are absolutely unprecedented times and the market is reacting in a very similar way. This massive over 30% drop has not been seen in over a decade since 2018, bringing our long strong bull market run to a screeching and abrupt halt.
This has many people, including me, is this a good time to invest. That is up to you, but what you have been doing up to this point as well as how you are positioned during this crisis has a major impact on how you should make your decision.
The corona virus pandemic has created a near 30% discount on stocks, which is very appealing to anybody, just like when you get those 30% off coupons in the mail it really makes you think! So following are a few factors to think about prior to diving into the market right now.
Did you prepare for these tough times presented with Corona virus prior to them happening? The way to prepare for these times is to have a nice emergency fund built up so that times where there is an emergency such as a pandemic you will be ready. You should optimally save up 3 to 6 months at least of expenses. This would help you in situations like this if you were to lose your job such as record setting millions have and are now relying on unemployment insurance.
If you have an emergency fund built up to cover basic life expenses like rent and food, the prospect of losing your job can feel much less stressful when you know you have a net to catch you as you get back on your feet. So if you don’t have any emergency funds set aside now may not be the best time for you to invest. Because even if you are still employed you have no guarantee in most cases that this may change in the future, so it may be a better time to build up and emergency fund than to invest.
Are You in Debt
If you are deep in debt it may not be the best time to invest during Corona Virus market drop.There are benefits in the CARES Act that have reduced federal student loan interest rates to 0% For up to 6months which makes this a great time to tackle student loan principle balances for the next 6 months which is a great investment in itself. Also, it may just not be a great idea to spend the money in the market when you have looming debt over your head and you may want to pay off debt instead.
However, if you plan things out and have a sufficient emergency fund while still being employed and can cover your debts months out as well as rent/food, the decision is up to your risk tolerance if you want to throw a little bit more into investment as well. Just make sure you budget well and look into the future assuming a non optimal turn out with your expenses.
How Long do You Plan to Hold Your Investment
If you are planning to buy and sell quickly, which I never would recommend, now may not be the opportunity you’re looking for. There is no guarantee the market does not drop further in the short term, which it very well could even though nobody does or ever has known what the market will do. The market could easily continue to drop as medical professionals and infectious disease experts have both predicted that this will get worse before it gets better based on current predictive models.
This 30% discount however will favor those who plan to buy and hold. Although you cannot predict the market you can surely assume that the market will recover from this drop and continue to go “up and to the right” as it has following every single drop in history. The Stock market has been resilient in the past and by all assumptions it should continue (in the long term) to follow that trend into the future. So if you have a long timeline, of at least holding the stock purchase for greater than 5 years, this may be a fantastic time to invest.
What should I invest in?
There are many many different ways to look at what you plan to invest in once you decide investing is right for you during this market drop. This is a very personal decision that each investor should look at as an individual based on some of the factors mentioned prior in this article.
I personally recommend a long time horizon investment during these times into a low cost low fee index fund. Single stocks are very attractive right now due to the massive drop of some popular companies. I personally am not one to tell you to not invest in single stocks, but I assume a less volatile route such as investing in a whole index like the large cap stock focused S&P 500 or conversely a small cap stock focused S&P 600 Wilshire 2000 indices. This gives you exposure to the markets current drop as a whole, but protecting you from the individual companies potential to drop further. But if that is a risk you are willing to take then you may reap the rewards.
Also if you buy right now and plan on a long horizon, you can further protect yourself from tax by investing inside of a Roth IRA/401k or traditional IRA/401k. This could improve your results over the long duration by being in a tax advantaged position, I personally invest in a Roth IRA for the tax free growth.
Time the Market?
Timing the market is almost never a successful strategy, because no one can do it consistently. But buying during a discount is not a bad thing whatsoever. If you are planning to invest now just remember “time in the market beats timing the market”. most dips recover at very unpredictable times and accumulate most of their growth during a very small number of days, if you wait for a further drop… these massive gains can easily be missed. So get your money in the market if you plan to invest.
Another option is to invest on a scheduled increment such as weekly, biweekly or monthly, to capture a good average of the overall using a “dollar cost averaging” approach. This way you will continue to invest on the discount during this large market drop, but will protect yourself more from poor timing during further dips or gains during your purchasing window.
Take Advantage of the 30% Discount
If you are employed, have continued income, can afford rent and groceries, have an emergency fund, and are looking to invest for the long term… Now is a great time to invest and hold on, you’ll be happy in a few years, but in a couple decades you will be very happy what these funds grow into down the road.
Don’t take my advice, just listen to Warren Buffet one of the best investors in history:
” Be fearful when others are greedy, and greedy when others are fearful.”
“Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold.”
Warren Buffet – Berkshire Hathaway