With the emergence of the coronavirus, we found ourselves in a global pandemic of proportions that, in our lifetime, we had only experienced in movies. Since March, we have been social distancing, wearing masks, and ordering our meals, groceries, and supplies online.
This disruption has changed our daily routines in ways we would never have expected. Fortunately, this pandemic has not been as deadly as the Spanish flu of 1918 but may have changed our lives in some manner forever.
While many of us have tried to stay focused on our family and work, it has not been easy. This disruption has changed our routines. After six months, parents are still finding themselves working from home while managing their children who are learning in a virtual classroom setting. In spring, we were all hopeful that social distancing would be temporary. But reality showed us this was not the case.
Many of us may find ourselves in this same setting until spring or summer of 2021. For example, Deutsche Bank publicly announced last week that its employees do not have to return to the office until July 2021.
Most of us have learned to keep enough food in our pantries and freezers to last several weeks without needing to make grocery store runs. Early in the pandemic, if we ran out of certain items, there was a good chance the stores were also sold out of the product. Our only option was to shop early in the day and stand in a long line to enter a store. Certain products seemed unobtainable. We were fortunate that the supply chain quickly rebounded to meet our needs.
COVID-19 taught us that, even in the U.S., we can experience empty grocery store shelves and people hoarding goods.
One takeaway from COVID-19 is to plan ahead and be prepared for the next disruption.
This pandemic is a reminder of why it is important to keep at least six months of cash reserves in your bank account. Many people have been laid off for months, many employees have permanently lost their jobs, and many small businesses have closed. The purpose of having a cash reserve on hand is to have the ability to access money in a financial crisis without incurring additional debt or having to sell your investments at the wrong time.
If you were not prepared financially for this pandemic, your primary focus going forward should be building an emergency cash reserve. It may be that in lieu of a six-month reserve, a 12-month reserve is more prudent.
The feeling was gut-wrenching as we watched the S&P 500 Index of large U.S. companies drop 34% in March from its market high on Feb. 19. The negative market swings caused much anxiety. If you panicked and liquidated a portfolio in late March, there was a good chance that you realized a significant loss. If you held tight, your portfolio should have rebounded. JPMorgan recently raised their expectations, predicting a 6% gain in the S&P Index this year.
While periods of market unrest are very unsettling, it is important to remember that history has shown us that the market will turn around. Our instinct in a volatile market is to sell out to preserve assets and avoid any additional losses. That approach might yield favorable results if we knew specifically what day to re-enter the market. But we do not, so hold tight.
The annualized return on the S&P 500 from Jan. 1, 1987 to Dec. 31, 2019, was 11.28%. Over this 32-year period, if you were out of the market during the 10 best-performing days, your annual return would have been reduced to 8.85%. If you were out of the market during the 50 best days of this 11,680-day period, your annual return would have decreased to 3.4%. History tells us that staying in the market yields better long-term results.
It is important to maintain a diversified portfolio so that, like in March, when the stock market plummeted, other asset classes—like bonds—performed well. If you are diversified, you are not investing in a single stock, or in a handful of stocks, and nothing else.
In most cases, an investor should have a variety of equity (stocks) and fixed income (bonds) in their portfolios. The best allocation or mix of investments depends on your age and risk tolerance level. The longer your timeline to retirement, the greater the opportunity to hold a higher concentration of equities. Managing risk as you age means gradually decreasing equity positions and increasing the allocation to fixed income.
COVID-19 has forced many us to change our daily routines and to re-evaluate our lives. We have not been traveling, attending sporting events, parties, or concerts, or commuting as much to work. These changes have provided us with the time to focus on our family, finances, and plan for our future. Sometimes, we get caught up in the fury of life and lose focus on what is important. Like it or not, COVID-19 has given us the opportunity for a reset.
Teri Parker CFP® is a vice president for CAPTRUST Financial Advisors. She has practiced in the field of financial planning and investment management since 2000. Reach her via email at Teri.parker@captrustadvisors.com.
https://goo.gl/hYDEHJ
No comments:
Post a Comment