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3 Things to Do Before Investing in Today's Volatile Stock Market

By Maurie Backman – Apr 2, 2020 at 5:06AM

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Now's a good time to invest -- provided you think things through beforehand.

The COVID-19 crisis has sent the stock market on a wild ride over the past few months, and while volatility may be a scary thing, it's not an unusual one. The reality is that this isn't the first time the market has seen massive swings in the span of a few short weeks, and with stock values still being relatively low, now's actually a good time to invest in it. But before you put money into stocks, it pays to check these important items off your list.

1. Make sure your emergency fund is solid

Investing in stocks is a smart thing to do with your spare cash -- money you aren't using right now, but also don't expect to need in the near term. In fact, a good rule of thumb is to only invest money you don't expect to have a need for in the next 10 years.

Jagged lines on a blue graph

Image source: Getty Images.

Here's the problem, though: Sometimes, we don't realize we need the money we invest until it's too late and that cash is tied up. Rather than run that risk, do a thorough assessment of your emergency fund. Figure out what your essential living expenses entail, and make certain you truly have enough cash in the bank to cover at least three to six months' worth. In fact, given today's economic circumstances, you'd really be wise to favor the high end of that range, which means having enough savings to cover your bills for half a year's time. This especially holds true if you expect your income to be impacted in any way over the next few months.

2. Assess your existing portfolio

Right now happens to be a good time to invest if you have the cash and are good on emergency savings. But before you load up on more stocks, figure out which ones you already have. If there's a specific segment of the market you're already heavily invested in, it could pay to look at different areas to better diversify. In other words, if you own a number of bank stocks, you might consider focusing on healthcare stocks right now, or auto stocks. And if you're really looking to ramp up on the diversification front, consider an S&P 500 index fund.

3. Be careful with hard-hit industries

Stocks can be risky investments in general, but right now, there are certain industries that are really feeling the impact of COVID-19 -- namely, airlines, cruise lines, hotels, and anything travel-related. Closures and supply-chain issues are also impacting retailers left and right. On the one hand, you may have an opportunity to buy some of these stocks at a substantial discount. On the other hand, we don't know what their recovery will look like, so make sure you do your research and focus on quality companies with strong business models and solid finances in spite of the crisis.

Investing is a great way to grow your wealth, but you shouldn't do so blindly. Check these key items off your list before loading up on stocks during a volatile stretch -- like the one we're experiencing now -- so you're less likely to regret that decision after the fact.

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