This year has been a doozy, right? A global health crisis, divisive U.S. political climate, civil unrest, and record-breaking unemployment -- even the boldest of screenwriters might be reluctant to combine all those plotlines into a single script. But here we are, trying to adapt and survive the stranger-than-fiction drama of 2020.
Tough financial times tend to motivate us to shore up our finances so we're better equipped to handle the next financial crisis. It 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, though investing in this economic climate is not for the faint of heart.
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Uncertainty abounds
Back in March, U.S. state governments began ordering lockdowns to contain the spread of the coronavirus. The stock market crashed, and retailers, restaurants, and hospitality companies lost billions as their customers stayed home under government order. Fast forward nearly four months, and the economy has opened up, the stock market has been oddly strong since its March free fall, and Treasury Secretary Steven Mnuchin claims the U.S. economy will have recovered from the coronavirus recession by year-end.
So what's the problem? COVID-19 cases are on the rise again, and some states are rolling back their reopening plans. Expanded unemployment benefits are running out, and that will mean more defaults on mortgages, rents, and other debts. Creditors and landlords will feel that pinch directly. Other businesses will feel the pinch indirectly, as household budgets tighten and people spend less.
That's a fair amount of economic uncertainty, which could lead to another bout of wealth-sapping market turbulence. Start investing today, and you may well see your young portfolio lose value in short order. If you're not emotionally and financially prepared to manage through that rough patch, it's not the right time for you to put money in the market.
Better now than never
On the other hand, a stock market crash can happen anytime, with or without a pandemic in play. Plus, it's always best practice to plan on riding out short-term volatility. Today's environment may feel particularly unstable, but it's actually not an inherently bad time to invest. Long term, you might come out ahead by kicking off 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 any funds you plan on using within the next five years.
- You can ignore the volatility and stay invested for long-term growth. This requires some emotional fortitude on your part. You have to resist the urge to panic and sell because that locks in your losses and eliminates any chance you'll recoup those losses in a recovery. Remembering this fact should help: The long-term average growth rate of the S&P 500 is 7% annually after inflation, and that 7% includes the Great Depression, the Great Recession, and every other bear market in history. Set a goal to achieve that 7% long-term average growth rate and commit to staying invested to reach it.
Remember, too, that a crash may lower the value of your positions temporarily, but it also lowers the prices of the shares you want to buy. By sticking with a regular monthly investment after a market correction, you'll reduce your average cost per share. That benefits you in a recovery because more shares and a lower cost basis together translate to bigger gains when share prices rise again.
Start today and stay in it
If there ever was a time to test your mettle as an investor, it's now. You can start investing today, as long as you're ready for the wild drama of 2020 to continue in the short term. That means investing funds you don't need to use right away and staying invested for the long haul. Master those two investing principles and you're on your way to writing your own ending to this story.
