If you’ve been monitoring your investment portfolio lately, you\u2019ve likely had some anxiety.<\/p>\n\n\n\n
With businesses and states shut down in varying degrees, unemployment in the double digits, and a stock market that swung from record highs in February to a 35% drop a month later,<\/a> being an investor is as unpredictable as it\u2019s ever been. This volatility and uncertainty can feel especially daunting if you\u2019re planning to retire in the near future.<\/p>\n\n\n\n The good news: Even though a worldwide pandemic is certainly unprecedented, unpredictable economic times are not\u2014and there is a roadmap to protecting your investments.<\/p>\n\n\n\n If the coronavirus has left you wondering what you should do with your investments, here\u2019s how to take it step-by-step:<\/p>\n\n\n\n Risk tolerance is the main foundation for how portfolios are evaluated. High risk tolerance allows for more growth<\/a> (but may result in short term fluctuations in your net worth), whereas less risk tolerance means you\u2019re more insulated from market factors\u2014including downturns. Risk tolerance will form the basis of any well-balanced investment portfolio.<\/a><\/p>\n\n\n\n To evaluate your risk tolerance, the most important thing to consider is your timeline for when you\u2019ll need the money you\u2019ve invested. In general, an investment timeline greater than 10 years<\/a> would be geared towards high-risk, high-growth opportunities (this is considered long enough to wait out any market downturns). Less than 10 years is when it\u2019s recommended you start phasing in more stable assets\u2014like government bonds and mature high-dividend-yield stocks. The other strategy is to save towards a specific target goal, and transition to a steady income based model once you\u2019ve reached that goal.<\/p>\n\n\n\n However, during a recession (or in anticipation of one), investors often choose to reallocate their portfolios toward less risk, to try to mitigate losses. While some investors choose to double down on what they see as stocks selling on discount. (Warren Buffet famously advising to<\/a> \u201cbe greedy when others are fearful.\u201d)<\/p>\n\n\n\n The first thing to consider: what exactly is in your \u2018portfolio\u2019?<\/p>\n\n\n\n For most individuals, this will be a 401(k), an IRA (either Roth or traditional), and maybe a secondary brokerage account. This traditionally is the sum of your \u201csecurities\u201d and is considered a somewhat illiquid asset. Your investment portfolio is seen as a complement to your savings account and assets like your house, altogether constituting your total net worth<\/a>.<\/p>\n\n\n\n It\u2019s worth viewing both your portfolio and total net worth together, to decide how to strategize with different accounts. It\u2019s also worth assessing your savings, as it\u2019s recommended you have at least 6 months<\/a> of living expenses in your account, not tied up in any investments or assets.<\/p>\n\n\n\n The next step is to consider how your total assets compare with your desired risk allocation. If you are looking to minimize risk during a recession, it\u2019s recommended you reduce your holdings in stocks, and increase your holding in cash and cash instruments such as government bonds up to 70%<\/a>.<\/p>\n\n\n\n The remainder of your portfolio is either stocks or cash. There is no right answer here and like most investment strategies, diversification will help lower your risk.<\/p>\n\n\n\n If you wish to invest in low risk stocks, it is generally recommended you find large cap, mature, high-dividend-paying stocks. These tend to be companies with household names like Walmart, Berkshire Hathaway, and IBM. A large cap<\/a> company has a valuation of more than $10 billion, and a \u201cmature\u201d company is considered one whose business model is established, and yearly revenue growth is lower. A high-dividend is generally considered in the range of 3% to 10% and you\u2019ll want to make sure the stock price hasn\u2019t come down dramatically recently, as this will artificially inflate the dividend yield. Certain industries, such as garbage collection and electricity are viewed as essential in any economic time, and are called \u201cdefensive stocks<\/a>\u201d for this reason, as they hold their value better during recessions.<\/p>\n\n\n\n If you\u2019ve checked your 401(k) recently and saw a decline in value, the most important thing to do is not panic. You first need to consider first how your 401(k) fits into your larger net worth, and then examine if your assets are allocated in a manner that suits your timeline and goals. If your current allocation matches your risk threshold, there may not be much to do other than wait for the economy to return to normal.<\/p>\n\n\n\n If you are very short on cash, and still have a source of employment, you may consider reducing your contributions to your 401(k). However, this is not generally recommended as your 401(k) is both tax deferred, and is usually matched by employers to a certain percent.<\/p>\n\n\n\n Early withdrawal is also almost always not recommended as 401(k)s have special tax incentives which make early withdrawals (before age 59 \u00bd) treated as taxable income, in addition to paying a 10% early withdrawal fee. <\/a>This is essentially two taxes on one withdrawal.<\/p>\n\n\n\n However, if you, a spouse, or dependent has been diagnosed with COVID-19, you may be eligible under the CARES Act to have the 10% early withdrawal penalty waived<\/a> for withdrawals up to $100,000 taken out of a 401(k), 403(b), or 457 retirement plan through 2020. You then have the option to pay the full federal income tax on the withdrawal, or repay the withdrawal amount over a 3-year period.<\/p>\n\n\n\n However, again it\u2019s worth noting that due to the compounding effect of interest, a dollar taken out of a 401(k) today will likely result in more than a dollar lost in potential value upon retirement.<\/p>\n\n\n\n Another option is to take a loan against the value in your 401(k). You can typically take up to 50% of your savings, up to a maximum of $50,000 in the course of a year (the CARES Act has doubled this amount to $100,000<\/a>).<\/p>\n\n\n\n Loans against your 401(k) have a number of benefits, primarily speed and cost as you don\u2019t need to be \u201capproved\u201d to borrow your own money. Loans also have a 5-year repayment schedule with no prepayment penalty, which provides great flexibility for borrowers.<\/p>\n\n\n\n While you won\u2019t owe any penalties or taxes, you will owe interest (based on the current prime rate). If you fail to pay off the interest, you\u2019ll incur the 10% early withdrawal fee<\/a>, compounding your losses. Furthermore if you lose your job early, you\u2019ll need to repay your loan immediately (or suffer the 10% early withdrawal fee), which can be stressful during unsure employment times.<\/p>\n\n\n\n During a recession, or any unexpected economic downturn, the stock market can be volatile. Ups and downs aren’t uncommon as consumer sentiment\u2014and particularly consumer fear\u2014sway day-to-day trades. If you’re investing for the long haul, most experts agree that you should largely hold the course and ignore any temporary dips in the market. After all, as Warren Buffett once said, “Someone’s sitting in the shade today because someone planted a tree a long time ago.”<\/p>\n\n\n\n But that doesn’t mean you should take your hands off the wheel entirely either. Keeping an eye on your investments can help you spot trends, see how your accounts are tracking against your goals, and help guide your future buys. And since you are investing for the long haul, keeping an eye on your investments can let you compare a current stock price to its original purchase price, so you know not to panic about what\u2019s happening today.<\/p>\n\n\n\nKnowing Your Risk Tolerance<\/h2>\n\n\n\n
How to Allocate Your Portfolio During a Recession<\/h2>\n\n\n\n
How to Safeguard Your 401(K)<\/h2>\n\n\n\n
What Happens If You Need to Take a Loan Against Your 401(K)?<\/h2>\n\n\n\n
Keeping Track of Your Investments<\/h2>\n\n\n\n