4 Financial Moves To Make Before Investing During COVID-19
To invest, or not to invest…that is the question…
And the answer is...well, it depends. With the stock market on a steady decline since the onset of COVID-19, a lot of people think that now is a good time to invest, and they are right, but only if you’re already prepared for the worst case scenario.
Below are 4 financial moves to make before you should start investing, especially during the COVID-19 pandemic. You have to make sure to have...
A fully funded emergency savings
To us, here at The Financial Gym, being prepared for the worst case scenario means having a fully funded emergency savings, or 6 months of expenses saved in cash, preferably in a high yield savings account. Want to learn more about building an emergency fund? Check out more here and here!
No consumer debt
It also means having your consumer debt under control. Ideally, you would pay off all credit cards and personal loans before beginning to invest. That being said, if you have a good credit score and your debt is at 0% interest for the next 12-18 months, it might be a good time to direct free cash into the stock market.
Free cash to invest
That’s the next piece of the puzzle, you have to have free cash to invest. You should not reduce payments on debt or forgo emergency fund savings in order to fund an investment account. In addition, if you foresee needing the money for a large purchase or other life event in the next 12-18 months, don’t invest it! There is no way to predict if the market will have recovered by then and the tax implications of short-term gains will be larger than for long-term gains.
A secure job that is not in jeopardy
If you feel there is at least a 50% chance of losing your job in the next 3 months, you should continue to save cash until you have more certainty around your employment situation. Saving more will allow you more comfort and security IF you do end up facing unemployment.
And a few other things to consider and be educated on...
Some people might be itching to invest, thinking that they will lose out on the opportunity to buy cheap stocks by not investing right now. The good news here is that the stock market is extremely cyclical, if you miss this downturn, there will be others that you can capitalize on. In addition, most recessions last an average of 14 months, which means even if you don’t get in today, you will have more than a year in which you can still buy stocks at a discount, assuming of course this is a prolonged recession and not just a temporary market pull back.
There is never really a “best” time to invest in the stock market and there is no way to predict if stocks will continue to fall or if they will bounce back once the COVID pandemic passes. That being said, as of Monday March 16th, the S&P 500 was down 29.5% from it’s all-time closing high of 3,386. Essentially, it’s 30% off, which is a pretty good sale! Since the S&P 500 tracks the stocks of the 500 largest US companies, it represents a fairly accurate picture of what is going on with the broader stock market and its performance right now indicates that stocks are cheaper than they have been since December of 2018.
Investing now will lock in these lower prices, but be warned we might continue to drop in value. In a perfect world, we would be able to predict when the market will turn around, but timing the market is nearly impossible, even for the most successful investment managers. Our advice during these difficult times is the same as it is during the good times, if you're investing keep doing what you are doing, as long as you don’t need the money in the next 12 months. If you’re ready to start investing, don’t delay! Make sure you have your emergency fund set and your debt under control, then set up an automatic monthly contribution to your investment account. This will allow you to invest throughout the downturn at varying prices levels. Overall, the most important thing to remember when investing is to keep a level head and understand that despite the bumpy ride, the markets will recover and they will help you to earn money in the long-run, no matter when you start investing.
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