Efforts to blunt the impact of the coronavirus pandemic have led to some of the most abrupt negative economic changes in modern history. First-time unemployment claims hit record highs as businesses shuttered or were otherwise restricted to reduce gatherings of people. Oil traded at negative prices as demand dried up and suppliers started running short of places to store the stuff.
Overall, The Wall Street Journal estimates that more than a quarter of the U.S. economy has been taken offline by efforts to fight the spread of that illness. There's reason to believe the economic fallout will get worse the longer restrictions stay in place. With all that going on around us, investing may very well be the last thing on your mind. Indeed, the easy answer to the question of whether you should invest new money during the coronavirus pandemic is a resounding "No!"
The foundation you need in place before you invest new money today
If you have a solid financial foundation in place, now may very well be a great time to invest in companies that look likely to survive this crisis and emerge stronger on the other side of it. You need to have that foundation in place because if you lose your job in the next round of layoffs, you don''t want to rely on selling those stocks to help you cover your immediate costs. Being forced to sell because you need the money is a recipe for losing money in a down market.
A strong financial foundation has the following three key factors:
- No "ugly" debt. That doesn't mean you need to be completely debt free. It does mean that the debt you do have should be at a low interest rate, have a low payment with respect to your income level, and serve a clear purpose for your future. If your debts don't pass all those characteristics, you first should focus on snowballing them away, then think about investing.
- Costs of living under control. You can only invest money that you have after paying all your bills -- both the expected ones and the surprises that pop up from time to time. If you're not in the position where you can cover those costs and have more cash coming in than going out, then you're not yet in the position to invest money. First, get rid of the expenses you don't need and figure out how to minimize the others, and then think about investing.
- Cash set aside for emergencies. At minimum, you should have $1,000 socked away for the "stuff happens" emergencies that happen to all of us before you start investing at all. At that point, if you're secure in your job, it's OK to consider investing enough in your 401(k) to maximize your employer's match. To invest beyond that at this time, you should really first have three to six months of expenses available as cash, just in case your job is the next to go.
The focus you need to shepherd your investments through the pandemic
As long as that foundation is in place, you can consider investing new money during the coronavirus pandemic. What you must remember, though, is that you should only invest money in stocks that you don't think you'll need for at least the next five years. You can use that long term focus in two key ways to help you invest smarter.
First, as the past couple of months remind us, the stock market can be incredibly volatile. A long-term focus will help you better stomach that volatility by helping you put distance between what's happening to your investments and what you need to cover your day to day life. It's incredibly hard to stay invested in rough times as it is, but if you're relying on that money to cover your rent, it's downright impossible.
Second, over the long haul, a company's strength and growth prospects matter far more to its stock's success than the market's day-to-day movements. A long term time frame helps you focus on those business fundamentals of the companies you're considering investing in. That can help you both make better buying decisions and see whether price declines during a market panic really represent an opportunity to buy more shares at a bargain price.
Foundation plus focus gives you a great opportunity to invest
If you have both a solid financial foundation in place and the long-term focus it takes to invest successfully, you may want to put your money to work in the stock market during this coronavirus pandemic. No matter how great the market's bargains may be, however, they'll only do you any good if you're able to hold on to those investments until better days return.
As the old saying goes, fortunes aren't made in bull markets -- that's just where they get revealed. That makes now a great time to get your solid financial foundation in place and develop the long term focus that you need. With those two factors in place, investing now may very well improve your chances of having your own fortune revealed in the next bull market.