Staying Calm When the World Is Not
It has been rough turning on the TV news these days. Or visiting social media. Or talking to just about anyone. There is no lack of issues that can cause stress and anxiety. The coronavirus. The stock market. Families with special-needs members need to take even greater care that they are prepared for times like these. Medically fragile people are at higher risk of complications from viral infections, and any lack of continuity of care—whether medical or nutritional–could be disastrous. These people and their caregivers must be prepared should a primary caregiver get sick and communication with support networks need to increase.
As a financial planner, I advise people on how to save and invest to pay for their lifelong dreams.
There are some financial basics that people must institute to prepare for disasters like the one we are experiencing today.
Build a mini emergency fund – Recent reports say the average US household has less than $400 available for emergencies. That is not enough. Target a goal of having $1,000 in your bank account, sock drawer, or home safe. All of this money needn’t be in held in real cash; it simply is available when you need it. Your bank or credit union is a great place for it.
Have some cash in hand – I still like old-fashioned cash and I recommend keeping some on your body or in your house. There is no magic number here – $100 or $200. Enough to go to the store and buy a full load of groceries should do it.
Reserves – After securing the first two steps, work towards accumulating a real emergency. It should be three to six months of household spending – enough to cover your mortgage, utilities, groceries, insurances, and other core expenses. As can be seen with the current issue, people cut their discretionary spending when required. Emergency reserves are for core expenses – a little extra buffer never hurts. If you have a steady income – as a teacher, in the military, or with a stable company – then you can have a smaller reserve fund. If you are in an industry prone to income swings – say on commission or in a small retail business – build bigger reserves and maybe even secure funds for longer than six months.
These last few weeks have had a mix of news about health issues and financial ones as the stock market has taken a dive. Market turmoil feels lousy at any point in life, and it can feel even worse if you have just retired or are using assets from a special-needs trust to pay for care and to maintain a quality of life for a family member with a disability.
There are some clear strategies that can be used to navigate through a market correction.
Cash reserves – For those who depend on their portfolios for income, keep additional cash reserves (Are you seeing the theme here?). Cash is great to have on hand, and while it feels like a drag on portfolio returns in positive markets, it is a great buffer against downturns and provides emotional balance. Remember, this is different than emergency funds. This is money that is there for your regular spending. There is no magic number here – some people feel comfortable with three months of cash reserves in a spending account, while others want enough to cover a year. Investments often have income from dividends which replace some of the money, and the reserve account buys time for dividends to accumulate. Also, downturns tend to be followed by recoveries, and the reserves buy time as you wait for stock prices to rebound. This is preferable to selling investments in a down market.
Patience. Stocks, especially, have periods of dramatic drops. Experienced investors know this, and unless they are desperate for cash, they will wait it out. The market has always recovered, and while there is never a guarantee that it will again, historically patient long-term investors have been rewarded.
Tax planning. The only real upside for people invested in publicly traded securities is that downturns give investors the chance to take tax losses. This does not work with retirement accounts, but for assets in trusts and other investment accounts, it is an opportunity to create tax losses that can be used to offset other gains. After the last financial crisis, mutual fund managers had years of tax-loss carryforwards that helped their investors for years.
Asset allocation and rebalancing. For most people, it makes sense to reduce risk the closer you get to needing your money. Trusts spending money, endowments funding nonprofits, and people at or close to retirement will likely have portfolios with mixed asset classes – some for preservation of capital, income, and growth. In strong stock markets like in 2019, portfolios tend to get over-weighted to growth. Regular review of your target allocation from your financial plan and rebalancing of portfolios can help prevent being over-concentrated and from taking too much of a tumble when markets turn.
Uncertainty causes worry and there is major uncertainty in our personal and investing lives today. Help yourself by following the simple tips from above and you can take some of the worries out of your life.