Those fortunate enough to still have disposable income and are interested in investing should pay attention to this adage; investing during times of turmoil is like trying to catch a falling knife. However, there are still smart ways to invest during turmoil and I’ll sum up everything this article says in one sentence — the best investing strategy during a crisis is the same best investing strategy when there is not a crisis. Find an index fund, setup monthly contributions, and stick with those contributions regardless of what the market is doing. I don’t recommend investing all your savings in the market at once. The market will likely have several more ups and downs. Setting up recurring investments will smooth over your investments over the market swings that are sure to come. Years from now, when the economy and market have recovered, you’ll be glad you took this advice.
Some people will not follow this strategy, but get lucky by investing all their savings at a low point in the market and, similar to the financial crisis from 10 years ago, we’ll hear about the people who made tons of money by perfectly timing the market. But for each of those stories, there will be many more people who timed the market incorrectly and lost money as the market continued to plummet. Below are strategies for how to invest wisely during in times of economic turmoil, by casting a wide net and catching some of the market’s rebound.
There is no guarantee that the stock market will quickly recover from the global COVID-19 pandemic. The unfortunate truth is that it may be a long time before the economy recovers to where it was at the beginning of 2020. Consumers’ confidence in leaving their home and spending money will be dampened by fear of infection for months if not years to come. At the beginning of 2020, it looked like any day the Dow Jones would reach 30,000 points, but weeks later it had plummeted below 20,000 in the fastest market decline in history. With consumer confidence wrecked, and the effects of COVID-19 sticking around for the foreseeable future, it’s hard to predict when investments will recover. However, this is also not the end of civilization as we know it. Yes, the pandemic will change things but advancements in healthcare and technology limit the chances we will enter a depression that stretches on for years. While things may feel very bleak, the economy will get better. Setting up an investment strategy now will pay out over the long-term.
Stock Market Outlook
There has been talk of a “V” shaped recovery from COVID-19’s economic downturn, as in the economy will recover as quickly as it’s come crashing down. This belief may be spurring some of the stock market’s large swings in the weeks since COVID-19 caused much of the world to enact distancing orders. The stock market is speculative, which means most of what happens in the stock market is based on what people are guessing the economy will look like six months to a year from now. Money is made in the stock market from correctly guessing what is coming next, but right now is a very hard time to make logical guesses. With so little firm knowledge to go on, every new piece of information causes big swings in the market — thus we get the yo-yo effect of the stock market dramatically swinging with even a little bit of news. I too lack omnipotent knowledge (or classified Senate Intelligence briefings) and cannot say with certainty what the market will look like in 6 months, but I believe the economy will take a long time to recover. Don’t be worried that if you don’t invest all your savings now you’re missing out on a get “rich quick scheme”, instead create a plan.
The economy will take a long-term hit from the pandemic, and because of that the stock market lost more than a third of its value before clawing some back as the predictions about COVID-19’s impact were slightly lessened. But the economy and the stock market will likely have a slow recovery over 2–3 years as the ripple effect of lost jobs, canceled events, social distancing, and continued fear of getting sick makes people more conservative with their spending habits. In the United States, 70% of our gross domestic product (GDP), another way to describe our economy, is based on consumer spending. People will be afraid to travel, go out to dinner and entertainment, and spend money on clothing and products, and until that changes the economy will lag.
Buy the Dip?
No one can predict with certainty what the next year will look like with the virus. We could get a handle on it and the economy will open back up, or we could have several more spikes in virus outbreaks and the economy will limp along for years to come. The stock market will likely go through several periods of large ups and downs. Be careful about betting too many of your resources on the stock market roller coaster ride. The best advice is to reevaluate your portfolio and create an investing strategy where you contribute a set amount at periodic intervals. For instance, try purchasing into an index fund every paycheck.
If you have been thinking about starting to invest in the stock market or want to increase your investments, pick an index fund and setup recurring investments. I always recommend Vanguard or Fidelity, mainly because those are the ones I know. Vanguard’s index funds have minimum investments to get started, but some of Fidelity’s will let you invest with no minimum required investment. I always try to avoid buying individual stocks, I’ve written about how individually picking stocks is more fun,but it’s not a smart investing strategy and I realize that individual stock picking is more of a game than a strategy.
Without thinking about where the market is at, setup an account with as much initial investment as you can afford and create recurring investments. The monthly payments should be within reason of what you can afford. Aspire to have 5–10% of your paycheck saved away in the stock market, on top of saving for your retirement. This is easier for some than others, but try to push your limits. By making monthly contributions you’re able to smooth out your gains and losses from what I believe will be several more months of the market’s ups and downs.
In a few years there will likely be articles written about people who invested wisely during the economic turmoil caused by COVID-19. Just look back at similar writings following the crash from the 2008 financial crisis. Investing smartly is the best way to ensure financial gain in the years to come.
I have written several other articles on smart investing that I hope are helpful to you:
- This story explains how to Get a Tax Break For Selling Your Stocks, something that people with stock market losses will find helpful
- I wrote a post called Rich People Don’t Keep Money in a Bank Account, You Shouldn’t Either
- Another is called Taxes on Savings are Unfair, Here’s How to Fix it
- 401(k)s are the Worst form of Saving, Except for All the Others
- Lastly, here is an important one called Did you Receive a Smaller Tax Return? Next Year Will be Worse