Welcome to NerdWallet’s SmartMoney podcast, where we answer your real-world money questions — in 15 minutes or less.
This week’s special coronavirus episode focuses on investing and your portfolio.
Concerns about the coronavirus pandemic and its effects on the economy have taken a toll on our investments. The stock market is setting new records, and not in a good way: The Dow Jones Industrial Average and the S&Ps 500 both had their worst first quarters ever, losing 23.2% and 20%, respectively.
Rather than head for the exits, though, most people should hold on. Historically stocks perform better than any other type of investment in the long term, and most people need that kind of growth if they hope to retire someday. If you don’t need the money in the next few years, then give your investments time to recover if you can.
If you do need the money sooner, or you can’t sleep at night because you’re worried about your portfolio, then you may need to make some changes. Money that you need within five years shouldn’t have been in stocks in the first place, so it makes sense to move it somewhere safer. And if you need to take less risk to avoid bailing entirely on the market, consider doing so.
The best approach for most investors is to focus on what they can control, rather than what they can’t. Investing more is a good idea when stocks are on sale, so bump up contributions to retirement plans or college savings accounts.
Ride it out. If you’ll need the money within five years, it shouldn’t be in the stock market. Otherwise, leave your investments alone so they’ll have a chance to recover.
But make sure you can sleep at night. Taking less risk is better than panicking and bailing on your plan.
Control what you can control. Look for a better rate on your savings, increase your 401(k) contributions or start a 529 college savings plan for your kids.
More on NerdWallet about investing during hard times:
Sean Pyles: And I’m Sean Pyles. As always, be sure to send us your money questions. Call or text us at (901) 730-6373. That’s (901) 730-NERD. Or email us at [email protected]
Liz: We’ve been talking in the last few episodes about how the coronavirus pandemic is affecting the economy and your finances, and what you need to know now. In this episode, we’ll focus on investing and your portfolio with the help of investing Nerd Arielle O’Shea.
Sean: Hey, Arielle, thank you for joining us. I want to start off by asking you what is the most important thing for people to know about their investments right now?
Arielle O’Shea: So the stock market is what’s really inciting a lot of fear right now. It’s up, it’s down, it’s up and then 10 minutes later it’s down, and it’s really scary for a lot of people. So the first thing to know is that if you’re investing for a goal that’s less than five years away — you have a down payment for your house that you want to buy in a few years, or you’re saving for a big vacation — that money should not be in the stock market anyway. You really only want to invest in the stock market for goals that are at least five years away. So, that makes you a long-term investor. And if you are a long-term investor, then the best reaction to these market moves is really no reaction at all. It’s really best to ride it out. If you don’t sell, you haven’t lost any money.
Even if you log in and you look at your 401(k) and it’s really terrifying, you just need to keep in mind that if you ride it out, it will come back, and long-term investors have that time on their side for your portfolio to recover. So this is really an opportunity. And a lot of people say that the stock market is the only market where when things go on sale, people kind of flee the store. And it’s really important not to flee the store right now. If you’re making regular investment contributions for your 401(k) or other investment accounts, keep in mind that you are getting more for your money right now, and so that is a good thing.
But if you’re scared — and it’s totally reasonable to be scared — it’s really important to remind yourself of your goal and your time horizon. That can help calm you down a little bit. If those two things haven’t changed, your goal is the same, your time horizon is the same, then your investment strategy really shouldn’t change either.
But the flip side of that is that this is a very stressful time, and so you really don’t want to risk your mental health. If the stock market is adding additional stress on top of everything else that’s going on, and you feel like you really can’t deal, you’re not sleeping, you’ve already sold, you can’t stop checking those account balances, then that’s a really good sign that you’re probably taking more risk than you can handle. And so it’s better to take less risk and be able to stick with your portfolio than take too much and be panic selling every time the market makes a turn for the worst. So, that’s a good signal to dial it back.
Sean: And what about folks who are closer to retirement? I know a lot of people are probably concerned that they won’t ever be able to retire because of recent drops in the market.
Arielle: If you’re near retirement, it’s a little bit of a different story but not totally. You still need to remember that you have a long time horizon, so you don’t stop investing on the day that you retire. You still need your money to last 20, 30, maybe even more years, and that means you need to keep it invested. And so you should still be thinking with those years in mind, but a lot of financial planners recommend having a pot of safe money. What that means is that you have cash available in savings or safer investments that you can cover for at least the first few years of retirement so that you’re not having to sell investments to fund your expenses, you’re building in that time horizon where you’re not going to need to sell stocks when they’re down because you have that cash available to fund your lifestyle during the beginning of retirement.
If you’re near retirement and you haven’t rebalanced or reevaluated how much risk you’re taking, it’s really important to do that. It’s not a great time to rebalance right now, but you should definitely be taking less risk as you approach retirement. And so take a look at that and make sure that you’re allocated the right way for when you’re retiring and how much risk tolerance you’re willing to take. And then I think at times like this you get itchy fingers, you want to do something. And it’s really important to control what you can control. So a lot of times that means saving more money if you can. You can look and see if you can lock in higher interest rates with CDs before they fall further. You could shop around and see if you can find a higher-yield savings account.
You can increase your 401(k) contribution if you’re going to be in there peeking at the balance anyway. Bump it up a percent. That might make you feel a little better. Max out an IRA. Consider investing more in 529s, if you have kids, for college. I did that the other day. Made me feel pretty good. And so those are all things that make you feel like you’re doing something, and they’re all positive actions that are good reactions to stock market volatility. And then if you find yourself in need of cash, it’s really important to know where you should get that money. Sara [Rathner] and Kim [Palmer] both talked about emergency funds and the importance of having that. But if you don’t have that or you find yourself running through it, then you should look at other cash savings, taxable investment accounts because you can pull money out of those without penalties.
And then retirement accounts are really last on the list. You want to preserve that money for retirement, and there are often penalties and taxes for pulling your money out. But a Roth IRA is sort of what we call like the best last resort because you don’t get taxed or penalized for pulling your contributions out. So that’s money that you’ve put into the account. Not your investment earnings, those fall under different rules. But you can pull your contributions back out at any time. So if you need to do that, and I would stress again, best last resort, then that’s the best retirement account to tap if you have one.
Liz: Getting back to the idea that stocks are on sale — is now a good time to invest more?
Arielle: I would argue that it’s always a good time to invest more, as long as you have the basics covered. [You have] that emergency fund that we talked about, you are investing for the five-year or more timeline that we talked about. If all of those things are true and you don’t have high interest rate debt, then yes, I think now is a good time to invest more money for sure. But don’t try to time the market. Never a good idea.
Sean: OK, but what if I want to try my hand at stock-picking? Should I do that or just stick with index funds?
Arielle: So our house view is that almost your entire portfolio should probably be invested in low-cost index funds and in ETFs. If you want to dabble in individual stocks, you think something is really hot right now or you just want to learn how to trade individual stocks, then we recommend keeping those to 10% of your portfolio or less. But generally speaking, most people should be invested in low-cost index funds. They’re easy to diversify, they are cheap, like I said, and they are the best way to build a portfolio, especially a long-term portfolio.
Sean: OK. What about those people who have those itchy fingers you were talking about and want to get started investing one way or another? Do you have any recommendations for where they should start?
Arielle: We don’t really give specific recommendations on specific funds or stocks, but we do have some lists on our site about best-performing index funds and best-performing stocks. So we have a best index funds page that people can check out. We have a best-performing stocks page that people can check out. And then we have high-dividend stocks, which is a list of stocks with not the highest dividends but the safest and highest dividends. So we take out the really risky ones.
Liz: What about changing our asset allocation? The market is changing all the time, and maybe I should be getting out of international stocks or small company stocks and moving to the safety of large company stocks. What do you think about that?
Arielle: I don’t think that you should be changing your strategy based on what the market is doing at any given moment. I think if you set that goal for reasons that you decided at that time, then you should probably stick to it. On the other hand, if you’re having trouble figuring out if your asset allocation is right for you or if you have the appropriate level of diversification, there are resources that can help you. You know at NerdWallet we talk a lot about robo-advisors, and they do a lot of that work for you if you’re interested. There are a lot of asset allocation calculators online. We have one too that doesn’t get super into specifics like you’re looking for, but it will tell you sort of the breakdown of how you should be investing. And then I always tell people to look at target-date funds.
So if you look at the holdings of a target-date fund, a target-date fund is basically a mutual fund that invests according to your age. So you pick a target-date fund with the year that you plan to retire in the name. So it would be Target Date Fund 2050, and it will change the amount of risk it’s taking as you approach that retirement age. If you pull up a target-date fund that aligns with the year that you plan to retire, you can see how that fund is invested, and you can mimic that in your own portfolio or at least use it to guide you. But if you’re looking to manage things yourself or you want to be more hands-on, I think that’s a really good way to learn about how the professionals are investing for your timeline.
Sean: All right, Arielle, I think that’s all we have time for. Thank you so much for sharing your insights with us. And now let’s get to our takeaway tips. First up, ride it out. If your goal is more than five years in the future, your investment will recover.
Liz: But make sure you can sleep at night. Taking less risk is better than panicking and bailing on your plan.
Sean: And lastly, control what you can control. Look for a better rate on your savings or bump up your 401(k) contributions to take advantage of stocks on sale.
And that is all we have for this episode. Do you have a money question of your own? Turn to the nerds and call us or text us your questions at (901) 730-6373. That’s (901) 730-NERD. You can also email them to [email protected] You can even email us your voice memos if that works for you. Also, visit nerdwallet.com/podcast for more info on this episode and remember to subscribe, rate and review us wherever you’re getting this podcast.
Liz: And here’s our brief disclaimer, thoughtfully crafted by NerdWallet’s legal team: Your questions are answered by knowledgeable and talented finance writers, but we are not financial or investment advisors. This nerdy info is provided for general education and entertainment purposes and may not apply to your specific circumstances.
Sean: And with that said, until next time, turn to the Nerds.