Having a plan key to weathering the financial storm
Recent stock market volatility has some investors worried, but there are ways to mitigate losses and with risk comes the opportunity to come out ahead.
Feb. 27 saw the Dow Jones Industrial Average plunge nearly 1,200 points followed by a roaring comeback on March 1 with a 1,200-point gain and then another fall as California declared a state of emergency on March 4 over increasing cases of COVID-19, the illness caused by coronavirus. In an effort to get more money back into the stock market, the Federal Reserve Bank on March 3 dropped interest rates by 50 base points causing a flurry of trading, but there is still uncertainty.
“The coronavirus is -- I call it a prescription for volatility,” said Ross Johnson, a financial adviser at Edward Jones, 117 N. Washington St. “Because, of course, it’s going to cause a lot of fear in a lot of investors' minds.”
With that fear comes the urge to sell off stocks to limit losses, but having a plan in place before a market correction happens is both the key to limiting losses and potentially making money.
Investors need to assess their level of comfort when it comes to risk and when they plan to access their investments.
“If you are investing to buy a new car or buy a house in a year, the stock market probably isn't the best place for your money because two weeks before you purchase that house, this can happen,” said Johnson of the recent volatility.
The financial plan also should be different for people of different ages.
“If you are funding an IRA, if you are a young investor, in my eyes, you absolutely buy into this market,” he said.
With financial markets being down 10%, Johnson likens it to buying stocks at a discount.
Investors nearing retirement age need to keep a balance between what they keep in the stock market and what they keep in safer investments, for example bonds. The plan then becomes shifting those assets around, from bonds to stocks when the market is low.
“I don't know whether it's coming back tomorrow or whether it's coming back 10 months from now, but we do know the stock market always does come back,” he said.
Other considerations involve the Fed rate cut. The purpose of the rate cut is to make it cheaper to borrow money, which can be helpful if you are planning on taking out a loan.
“It’s an amazing time to buy a vehicle and get locked in a super low rate,” said Justin Smaaladen at First Community Credit Union on 32nd Avenue South. “Not only are auto rates low, mortgage rates are at an all-time low, too, I think, so they just keep aiming to drop.”
The rate cut may cause certificate of deposit rates to drop as well, which is good if an investor already has money locked up. If rates continue to fall people may not get the same rates when it comes time to renew.