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The market is having a tumultuous time, thanks to the coronavirus outbreak.[1] Seven of the largest 20 swings in the S&P 500’s history have occurred in the past month,[2] and this market volatility led to the first emergency interest rate cut by the Fed since October 2008.
In times like this, it’s most important to make sure you and your loved ones are safe, that you’re practicing healthy habits, and that you are well-prepared if there are quarantines or school/work closures.
But it’s also important to make sure your finances are in order. Seeing the market headlines and volatility can add to the stress and cause bad financial decisions. Some important things to consider include:
Make sure you have emergency funds
This means having some physical cash (at least a few hundred dollars) in case of an absolute emergency, and also having enough money in checking/savings to cover at least 3 to 6 months of basic living expenses
Try not to fixate on the daily moves of the market
Almost every day last week, the market had a crazy day, moving up or down by a very large amount. But over the past five days, the market barely moved at all. Limit your stress by not paying too much attention to the daily market news, particularly if most of your investments are in retirement funds (IRAs, 401(k)’s, 403(b)’s, etc) that you don’t plan to touch for many years.
Don’t do anything drastic
In volatile markets, people often make drastic moves such as selling out of their investments entirely, or aggressively buying stock. In the 2008-2009 downturn, many people, including some friends and family, sold all of their investments. While they may have avoided some losses as the market fell to its bottom in early March 2009, they also missed out on the stock market increasing by over 300% over the next 11 years, the longest bull market in history.
But a large decline isn’t always a buying opportunity either, no matter what friends, family, or the President of the United States says. No one really knows how long or severe the coronavirus outbreak may be, and almost any prediction of its ultimate impact on the markets is no better than a guess.
Historically, I’ve found things go best when I avoid taking major actions from a place of intense emotion. Almost always, I’ve been better off simply doing nothing, or doing something much more deliberate and gradual. While this is not investment advice, it’s pretty good advice for most areas in life.
I hope this has been helpful. If you liked it, please share it with a friend! Also, please send me your feedback, requests, and success stories.
[1] The Internet is filled with misinformation about coronavirus, and sometimes it seems like half of the people on Twitter believe they are epidemiologists. Some source I trust include Helen Branswell (from the excellent STAT News), BNO Newsroom and the Johns Hopkins CSSE Case Tracker (for tracking new cases), and the major newspapers (NYT/WP/WSJ). If news doesn’t make it into one of those, there is a major risk it is oversensationalized, rumor, or just wrong.
[2] The broader public tends to talk more often about the Dow Jones Industrial Average (the “Dow”), and the media tends to lead off with it. But in reality, the Standard and Poor’s 500 (the “S&P 500”) is far more representative of the large publicly-traded companies that drive the US economy, drawing 500 companies from almost every sector. By contrast, the Dow Jones Industrial Average simply contains 30 well-known US companies from a handful of sectors. There are also some strange ways in which the Dow is calculated (it is simply based on the sum of the prices of its 30 companies, adjusted for certain corporate events) that don’t make much sense today.