It’s unnerving to see the headlines and predictions about the coronavirus, whether you’ve been invested for years or you’re looking to get invested.
When there’s so much uncertainty, it’s natural to feel like we should do something, but what should you do?
When we feel threatened, we instinctively want to try to protect ourselves, and that can lead some investors to put their investment plans on hold.
They stop investing, or some even sell out of the stock market, assuming that they’ll start investing again later when things have settled down. But do things ever really settle down?
The reality is that there’s almost always some cause for concern. Last year, it was the inverted yield curve and recession fears. At the start of this year, it was the potential military conflict with Iran. Now, it’s the coronavirus, and soon it’ll be the US election. And after the election, there will be something else.
Often people assume they’ll be out of the market for a short time—until things clear up or they get more information. But we have more information today on the coronavirus than we did a month ago, and this doesn’t make the future any clearer and it doesn’t make it easier to invest.
Buy, sell or hold? It depends.
The right response to current fears depends on your goals and needs.
Most investors are better off positioning for the long term and riding out near-term pullbacks, however, for some investors, this could be a chance to buy in at lower levels, while others may find it’s time to dial down risk.
If you have money on the sidelines that you won’t need for a decade or so, and you’re OK if the market continues to decline for now, then a downturn could be a good time to get some of it invested.
Or, if you have a balanced account and your equity holdings are slightly underweight due to the market decline, you could rebalance back to your target by selling a bit of your bond funds and buying more stock funds.
On the other hand, if you’ll need your money sooner rather than later, or you know that you can’t afford to lose much more than this, then it could be time to lighten up on equities.
Market declines are particularly risky for those who are a few years away from retirement or a few years into retirement, as we wrote here. A big loss early in retirement can undo years of investment success. You run a higher risk of running out of money if you retire in a bear market because you’re withdrawing from your portfolio while it is losing value. If you’re in this position, then the recent volatility may be a wake up call that it’s time to change your allocation or dial down risk.
If you have taxable accounts, this could be an opportunity to realize losses, which can lower your tax bill.
Keep risk in mind
If you feel like you have to do something right now, then try to do something relatively small that can help you avoid taking more drastic action later. For instance, you might sell 10-30% of your stocks if it helps you avoid selling 100% down the road. However, you should recognize that selling now means locking in recent losses and potentially missing out on gains when the market bounces back. Make sure you understand the risks before you make any sudden moves.