It is becoming clear both in the U.S. and in international communities that the fight against Coronavirus is going to last longer than anyone wants.
While congress continues to debate over the best way to stimulate the economy, many of us are taking the brunt of the impact—that includes our investments.
Take the Dow Jones Industrial Average (DJIA) stock market index for example.
On February 12th, 2020, the Dow set a record high of 29,551.42 points for the entire index. Then, on March 20th, 2020—just over a month later—the Dow closed at under 20,000 points.
That’s about a third of the overall index value lost due to Coronavirus concerns!
These are uncertain times for both the world and our investments.
If there is one thing I can assure you, it’s that the stock market will return to its former highs that we saw in February of 2020.
The lowest point the Dow reached in the Great Recession was 6,469.95. Just ten years later and the Dow was closing out a record 2019.
On top of that, from 1999 through 2019 your money in the S&P 500 stock index would have grown an average of over 6% every year if left alone. That includes riding out the Great Recession.
So what should we do about it now? How can we possibly manage our investments well with all the uncertainty in the market right now—even with the certainty that markets will rebound?
Let’s dive into three ways to manage your investments during these uncertain times.
Dollar-Cost Averaging is the practice of investing the same amount of money into stocks on a regular basis.
If you’ve ever had a percentage of your salary taken straight from your paycheck and deposited into your 401K through work, this is the same as Dollar Cost Averaging. You are investing the same amount every time you get paid.
Dollar-Cost Averaging is one of the best ways to invest in stocks because it happens independently of the market value. That means sometimes, like now, you’re going to be buying stocks at a much lower cost because the market is lower.
That does mean you will continue to buy stocks at higher costs when the market goes up, but that doesn’t matter.
The stock market generally goes up over time even with downturns or crashes like we’re seeing now. You will always be making money on your stocks in the long-term as long as you keep investing.
Don’t let the current market trends discourage you from continuing to pour money into your investments. Continue putting the same amount in on a regular basis using Dollar Cost Averaging.
With the market being lower, now is an even better time to increase the amount you’re investing on a monthly basis if you can swing it.
In another ten years when the market is at an all-time high, you’ll be glad you did.
Invest in Low-Fee Index Funds
The Dow losing a third of its value in a month should confirm one thing for you—it is impossible to time the stock market.
Actively managed funds try and do just that. You are paying high fees to have someone in your brokerage firm of choice actively trade stocks to try and get you the best possible return.
The problem is it doesn’t work.
That’s why choosing a low-fee index fund is the best way to get the greatest returns on your investments.
Statistically, choosing a low-cost index fund will always beat an actively managed fund. At the same time, it saves you a ton of money in fees over the long-term.
You can find Index Funds with an expense ratio (the average cost of the fund) at, or sometimes even lower, than 0.02%. Fidelity even has funds that have a zero expense ratio.
To compare, actively managed funds have an average expense ratio of 0.5%-1%. That’s more than 10 times the amount of an index fund.
An actively managed fund with an expense ratio of 1% has 100 times the cost of an index fund with an expense ratio of 0.01%!
Fees will eat into a lot of your returns over the course of years so it’s in your best interest to keep them to a minimum.
Even though it’s a great time to buy into the lower stock market, the reality is that we’ve all probably lost a good amount of money. It’s important to not lose any unnecessary money through times like these.
Do yourself a favor and invest in low-cost index funds so you’re not losing so much money to fees.
Consider Investing Into Target Date Funds
Target Date Funds are funds that use a computer to automatically adjust your stock portfolio toward safer investments (i.e. government bonds instead of stocks) as the portfolio gets closer to the “target date.”
The target date is the fund date closest to the year you want to retire.
For example, I have a Target Date Fund through my 401K that has a target date of the year 2050. That is the closest year to the year I would traditionally retire.
Usually, when markets correct or slip into a recession, investments like U.S. Treasury notes and bonds are considered safe because they are backed by the government. The chance of default is virtually nothing.
Interest rates on bonds tend to increase in a recession leading to better short term gains over the stock market.
Because of the relative safety, it’s important to rebalance your portfolio as you get closer to retirement. For a little bit higher of a fee than a traditional index fund, a Target Date Fund will do that automatically for you.
Fees are still quite a bit lower than actively managed funds since no humans are involved.
The slightly higher fees are offset by the added safety you get by not having to rebalance your portfolio manually. It’s the best of both worlds!
Think about this. If you are looking to retire in a couple of years and the stock market crashes, you would maintain much of your money if you were investing in a Target Date Fund.
It wouldn’t affect you nearly as much as someone whose entire portfolio was in the stock market!
Take a look at Target Date Funds in your brokerage firm of choice.
Certainty in Uncertain Times
Uncertain times cause us to scramble for certainty. They cause us to seek something solid to hold on to.
Many people panic and sell their stocks after a stock market crash in a bid to find secure ground. This is actually counterproductive and can seriously derail your retirement savings.
I encourage you to use the three methods above to double down on your investing. There is never a better time than when the stock market is low.
Will the stock market go any lower? It’s impossible to say. History says there is a good chance that it will go lower. But we don’t know how fast it will bounce back from the Coronavirus sell-off.
If you’re in this for the long-term—and believe me, that’s the absolute best way to invest—continue to use Dollar Cost Averaging to invest in Index Funds and Target Date Funds.
The stock market will bounce back before you know it and you’ll be sitting on a solid amount of money.