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Retirement Accounts & Other Household Investments Lost $14.2 Trillion Due to COVID-19. Are You Prepared for a Second Wave?

By Christy Bieber - Jul 8, 2020 at 9:17AM

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Here's how to get ready.

The novel coronavirus upended much of American life and caused a lot of heartache for investors.

While the market has recovered most of the major losses experienced in March, portfolio watchers likely panicked earlier this year when they saw their investments tumble in value -- especially as the losses were dramatic between Feb. 19 and Mar. 23. In fact, during just those few weeks, the Center for Retirement Research found U.S. households suffered $14.2 trillion in direct and indirect losses in their investment account balances. This included $4.4 trillion in losses in 401(k)s and similar plans as well as IRAs, $1.8 trillion in defined benefit plans, and $8 trillion in household non-pension assets. 

The fact that the market largely rebounded in the subsequent two months provides an important object lesson: If you hold tight and don't panic when things look bad, there's a very good chance you'll get your money back -- perhaps sooner than you expected.

But while investors may have regained much of their money, that doesn't mean the worst is necessarily behind us. With COVID-19 cases rising and some states pausing or reversing their reopening processes, it's possible similar losses -- or even bigger ones -- could occur in the upcoming months. 

While no one can predict if or when a second wave of COVID-19 will send stocks plummeting, there are a few key steps you should take to prepare for the possibility of a second wave that once again sends markets tumbling. 

Broken white piggy bank with coins spilling out.

Image source: Getty Images.

Don't invest money you'll need in the short term 

There's a very real risk that another market crash will come soon, especially if COVID-19 cases keep spiking. You should still invest, though, since history (including recent history) has shown that recoveries always follow corrections. But it is a reason not to put money into the market that you'll need within the next two years.

If you invest cash that you need in the short term, you could be forced to sell assets at a loss because you don't have time to wait for them to rebound. Imagine, for example, that you'd sold in mid-March because you needed the cash and missed out on April and May's rally. 

You don't want to put yourself in this position, so keep money you may need soon in a high-yield savings account. Only invest money that you're comfortable leaving in the market for a while. 

Make your investment strategy recession-ready

If you're confident in your investment strategy, you don't need to change it. But if you haven't assessed your risk tolerance or asset allocation for a while, a shift may be necessary. 

Generally, the percentage of your portfolio you should have invested in stocks is based on your age subtracted from 110. However, if you want to be more aggressive, you may invest more in the market. Those with a lower tolerance for risk may want to put slightly less into equities. It's tempting to just stay the course and not shift your investment allocation when things are going well, but it's a good idea to do a quick assessment now that the road forward may be bumpy. 

Make sure you've got a sound strategy for picking your investments. For most people, index funds are the way to go. But if you're investing in shares of individual companies, do you have a sound approach to selecting them

Prepare to hold investments over the long term

Warren Buffett famously said, "If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes."

This advice is more pertinent now than ever because the risks of short-term investing only go up in a volatile market. Long-term investors tend to do well buying in turbulent times when there are opportunities to score discounted shares -- but those who aren't ready to stick it out for the long haul could find themselves panicking and selling at just the wrong time, locking in their losses.

Again, if you'd bought in at the beginning of February in hopes of making a quick buck over the course of the month and you weren't confident enough to sit tight, you might have been in trouble if you panicked over your losses and sold your stocks in mid-March. 

And while investors did suffer $12.4 trillion in losses during mid-March, the speed of the market rebound was shocking with the S&P 500 having its best week since 1974 in the beginning of April, continuing its meteoric rise in May, and ending slightly up in June.  The fact the market recovered so quickly really reinforces just how important it is not to panic. If you'd sold when you were losing money in March with hopes of buying back in when things settled down, you'd almost assuredly have missed out on getting your money back since the recovery happened so fast.

Long-term investors didn't have to worry about that. And if a second wave happens, they'll be starting from even, or close to it, rather than sitting on losses and wondering when to invest again -- potentially missing out on more gains if they're trying to wait out the second wave but the spike in coronavirus case doesn't end up tanking the market again.

Shore up your emergency fund

Emergencies can happen at any time, but they're especially likely to occur during a recession and public health crisis like the country is experiencing now. Don't invest so much of your cash that you have nothing saved to cover income cuts, illnesses, or other calamities. 

To make sure you don't end up in debt or forced to raid your investment accounts, prioritize saving up an emergency fund. It should hold enough to cover several months of living expenses. This can keep your investment accounts safe while also giving you peace of mind. 

Plan to increase your investments

If you have a full emergency fund and a sound investment strategy, consider putting more money into the market.

Investing might sound counterintuitive when the economy is doing poorly and there's a real risk of another market crash. But bad times often present the best opportunities, as you can often get a discount on shares of quality companies.

By increasing the amount you're investing now, you can benefit from an inevitable future economic recovery and hopefully see above-average returns over time. That's a great payoff for overcoming a little bit of fear and coping well with some potential short-term losses.

Don't get caught off guard 

Stock market losses aren't worth panicking about. The very fact that retirement and pension accounts regained so much of the $14.2 trillion in losses so quickly demonstrates that. But if you aren't personally prepared to invest in a volatile market or ready to make successful investing choices in a deep recession, the next few months or even years could be painful for you. 

Now is the time to put in the work so you're ready if things get worse. There's nothing wrong with hoping that brighter times are around the corner. Still, you should always make sure you're financially ready for a period of prolonged rainy days so you can withstand the storm and come out stronger.

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