The COVID-19 pandemic has sent global markets into a tailspin and disrupted the lives and livelihoods of millions worldwide. Singapore has unveiled a landmark Resilience Budget totaling $48.4 billion to cushion the economic fallout. But given that the COVID-19 pandemic could last for at least a year, and the economic repercussions possibly longer, what impact could this have on your finances?
If you have been working from home, you might have saved some money on transport or meals outside. And with entertainment venues now closed, you will likely be spending even less, which can help you save up more for possibly rainy days ahead. As uncertainty continues to hang in the horizon, how else should you be managing your financial health right now? And what are the pitfalls to avoid?
Do: Bulk up your emergency fund
Global markets continue to be choppy and nobody knows if the economy could worsen or if we might see a recovery soon. This financial uncertainty is the reason why having an emergency fund is so valuable. While the recommendation is usually to keep three to six months’ of your take-home pay as cash savings, consider bumping up that amount if you can.
Review your spending and look out for anything you are paying for that you might not truly need. Adjust your budget if need be and commit to sticking with it throughout this period. With more hours spent at home, take the extra time to also automate all your accounts to make saving easier.
Do: Review your risk appetite
If the markets have been keeping you awake at night, it may be time to revisit your risk profile. Market ups and downs are part and parcel of investing. If your portfolio is at the right risk level, the best course of action would be to sit tight and wait this downturn out.
Following the stock market gains of 2019, your portfolio’s allocation to stocks could have increased, and you could unknowingly be taking on more risk than you can realistically handle.
When things go south, you may panic and sell your investments at the time when they have already lost a lot of value, thus turning your paper losses into permanent ones.
In times like these, consider using a tool like Syfe’s risk questionnaire to ensure your portfolio is at a risk level that matches your risk appetite. The company’s broad diversification and risk-managed investing approach can also help you sleep tight and stay invested.
Do: Stick to your investment contribution plan
A 30-year old only needs to save $464 each month to retire a millionaire. The key is to keep investing consistently and let compounding do its magic. In the current market, you may be tempted to stop investing altogether. But if you have already been making steady contributions to your investment accounts, don’t stop now. With prices coming down, your deposits can buy more assets – think of it as buying stocks “on sale”.
If you are new to investing, now could be a good time to embark on your long-term investing journey as well. Take advantage of a strategy known as dollar-cost averaging. This involves investing money into the market at regular intervals, no matter whether the market is up or down. You can capitalise on lower prices now while avoiding the risk of buying all at once ahead of a dip.
Don’t: Flee the stock market for cash
In general, the longer your investment horizon – say, your planned retirement is 30 years away – the more likely that you need to hold investments that can outperform over time. And despite their short-term volatility, stocks still offer the best chance of providing inflation-beating returns over the long-term.
Moreover, research shows that missing out on just a few best-performing days of the market can impact your long-term returns. Say $10,000 was invested in the S&P 500 index from 1999 through 2018. Missing out on the best 10 days during this 20-year period would have cut the growth of the initial investment by more than 50%. And if the best 20 or more days were missed, the returns over that period slipped into the red.
Exiting the market when stocks tumble is a surefire way of missing out on the initial days or weeks of the market recovery. Market tops and bottoms are only clear in hindsight; waiting to re-enter the markets when the “worst is over” could mean you have already missed out on some of the recovery.
Don’t: Check your accounts too often
Staying on top of your finances and investment accounts is important, but checking them daily will not change their performance. In fact, doing so could cause you more undue stress and anxiety. While you cannot avoid all news about COVID-19 and its impact on the economy, you can save yourself a lot of unnecessary grief by not checking your portfolios every day or even every week.
A prolonged stock market bloodbath can make even the most level-headed investor second guess their strategy. Checking your accounts too frequently could also cause you to make investment decisions you may later regret.
These may be unsettling times but at the end of the day, we will be able to get through it by staying calm, staying united and looking out for each other.
This article first appeared as a guest post on TheFinance.Sg.