This year has been a doozy, right? A global health crisis, a political climate that divides the United States, civil unrest and record unemployment – even the most daring screenwriters might be reluctant to combine all these plots into one storyline. But here we are, trying to adapt and survive the stranger-than-fiction drama of 2020.
Difficult financial times tend to motivate us to consolidate our finances so that we are better equipped to face the next financial crisis. This happened after the Great Recession, when household debt declined between 2008 and 2013.
This time around, building an emergency fund and investing in the stock market for long-term wealth may be your top priorities. Both efforts will benefit you, although investing in this economic climate is not for the faint of heart.
In March, US state governments began ordering shutdowns to contain the spread of the coronavirus. The stock market crashed and retailers, restaurants and hospitality businesses lost billions as their customers stayed home under government orders. Fast forward nearly four months, and the economy has opened up, the stock market has been uncannily strong since its free fall in March, and Treasury Secretary Steven Mnuchin says the US economy will have recovered from the recession of the coronavirus by the end of the year.
So what is the problem? COVID-19 cases are on the rise again and some states are canceling their reopening plans. Extended unemployment benefits are running out, which will mean more defaults on mortgages, rents and other debts. Creditors and landlords will feel this pinch directly. Other businesses will feel the pinch indirectly, as household budgets tighten and people spend less.
That’s a healthy dose of economic uncertainty, which could lead to another episode of market turmoil that will sap wealth. Start investing today and you could well see your fledgling portfolio lose value in the short term. If you are not emotionally and financially prepared to get through this tough time, now is not the right time for you to invest money in the market.
Better now than never
On the other hand, a stock market crash can happen at any time, with or without a pandemic in play. Also, it is always best to plan ahead to ride out short-term volatility. Today’s environment may seem particularly unstable, but it’s actually not a bad time to invest. In the long run, you could come out on top by starting your investment plan today, assuming:
- You can afford to keep your money invested until a recovery is underway. The rule of thumb is to avoid investing funds you plan to use in the next five years.
- You can ignore volatility and stay invested for long-term growth. This requires some emotional strength on your part. You should resist the urge to panic and sell, as this locks in your losses and eliminates any chance of recouping those losses in a rally. Remembering this fact should help: The long-term average growth rate of the S&P500 is 7% per year after inflation, and that 7% includes the Great Depression, the Great Recession and every other bear market in history. Set a goal of achieving that 7% long-term average growth rate and commit to staying invested to achieve it.
Also remember that a crash can temporarily lower the value of your positions, but it also lowers the price of the stocks you want to buy. By sticking to a regular monthly investment after a market correction, you lower your average cost per share. This benefits you in a rally because more stocks and a lower cost base together translate into bigger gains when stock prices rise again.
Start today and stay there
If there was ever a time to test your mettle as an investor, it’s now. You can start investing today, as long as you’re prepared for the wild drama of 2020 to continue in the near term. This means investing funds that you don’t need to use right away and staying invested for the long term. Master these two principles of investing and you’re on your way to writing your own end to this story.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.