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Is 2021 a Good Time to Invest?
With U.S. and international stocks in flux thanks to the coronavirus pandemic, it’s easy to assume that investing your money right now isn’t the brightest idea. However, as with any recession, certified financial planners say there are still solid opportunities to invest some cash — as long as you’re confident you won’t need it in the short-term. (For short-term needs, set aside an emergency fund in a high-interest savings account).
“There is a huge certainty, which is valid, that coronavirus is going to bring the US economy to a halt,” said Larry Sprung, CFP, Mitlin Financial‘s president and lead wealth manager. “A tremendous amount of revenue is being lost in specific industries and it has a cascading effect. I think the fear factor is really feeding fuel to the fire and is causing people and institutions to panic-sell and adding further downward pressure to the market.”
Investing during the coronavirus pandemic recession
It may seem daunting to put your money into stocks or a 401(k) plan right now, but financial experts say recessions can be a great time to start investing for the long term.
“I think if you’re somebody who has not invested yet, and you don’t have an IRA or 401(k), right now presents a once-in-a-lifetime opportunity to invest,” Sprung said. “It’s a really good time to invest, especially with a 401(k) plan. For people who have already invested, it’s a good time, but I wouldn’t put all the money to work at once.”
Related: the best online stock trading brokers of 2020.
Carolyn McClanahan, M.D., CFP, director of financial planning at Life Planning Partners, says people should always have an investment policy that they follow in good times and bad, and continually invest no matter the market conditions.
She suggests people should have a more conservative approach depending on how much of their savings and income they’ll need on a daily basis. “So for example, if you’re young, maybe you should be 80% equities and 20% fixed income. When the market crashes, like now, you should move some of your fixed income into equities to get it up to the 80% mark again,” McClanahan said. “Likewise, if the market is doing well, you should sell your extra stocks and put it in fixed income.”
Why it’s important to diversify your investments
Diversifying your investment portfolio is a technique that helps reduce financial risk. By having a variety of investments across different industries and assets, you’re not putting all your eggs in one basket, and therefore you’re minimizing the risk of your investments dropping considerably in value in the long term.
“Having an asset allocation forces you to sell high and buy low without any regards to emotion or market conditions,” McClanahan said.
There are several ways to diversify your investment. If you’re young and new to investing, for example, Sprung recommends putting money in a 401(k) plan or an individual retirement account.
“The easiest place to start is a retirement vehicle, such as a 401(k). If a 401(k) is not an option, then you can look into an individual retirement account (IRA),” Sprung said. “Don’t find only one stock or one company to invest in.”
If you haven’t filed your 2019 taxes, you have until July 15 to open an IRA account and make a yearly contribution. However, you should avoid putting all your savings in the market at once.
Related: the best IRA accounts of 2020.
“If you have $20,000 set aside, then invest 20% to 30% of that once a month systemically over the next few months to ease your way into the market,” Sprung said. He says that strategy allows people to still buy at lower prices if the market hasn’t hit a bottom yet.
But what’s a better long-term investment — stocks or bonds? Sprung says stocks outperform over a 20-year period.
“The 10-year treasury note is only yielding 1.15%, so if you buy that and you hold it your return is going to be low,” Sprung said. “In most cases, for younger folks who have the time and can experience volatility, I would recommend a stock allocation over a bond allocation because the stock will outperform.”
Make a plan for your money to grow over time
You’re probably asking yourself: How much should I set aside to invest? The truth is that while it’s critical to have a gameplan, even in your 20s, there’s no minimum dollar amount to begin investing.
“A lot of young people don’t invest early because they feel they need a large sum of money to invest, but putting something away is better than not putting anything away at all,” Sprung said. “Use an online investment calculator to back into a number, so you can start achieving funds towards your retirement goal.”
When possible, Sprung suggests leveraging the “The Richest Man in Babylon” rule: Take 10% of your pay and put it aside for yourself. He says the younger you are, the more important it is to get started to maximize compounding (when original investment generates earnings).
“People tend to get distracted by what’s going on, but you don’t want to time when to get in and when to get out of the market,” Sprung said. “The longer you have money in the market, the better off you’ll be. The minute you start timing the market — that’s when you’re in trouble.”