- With significant health risks, a potential recession, and markets down, this is an unsettling period for many of us.
- Financially, there are opportunities younger investors can take now that may help them protect themselves, avoid costly mistakes, and position themselves to achieve their long-term goals.
There have been a lot of pretty wacky ideas floating around social media aimed at helping young people deal with the financial effects of COVID-19. Among them: Stock up on hard cash, refinance your home to free up cash to buy stocks, and borrow money in fear that the credit markets will seize. At challenging times like this, it's important to stick with strategies that have passed the test of time.
Introducing Fidelity SpireSM
"COVID-19 has ushered us into a period of heightened uncertainty when we need to be there for each other," says Ann Dowd, CFP®, and vice president at Fidelity. "But history reminds us that the country, the economy, and the financial markets have recovered from past crises. And for young people particularly, these difficult times can also create opportunities for a brighter future."
Here are 5 smart strategies for young investors (or anyone with more than 10 years until retirement) to take to make the most of this bear market, and the opportunities afforded by the recently passed CARES Act.
1. Check your emergency fund
If anyone needed a reminder of the value of an emergency fund, COVID-19 certainly provided it. Our general rule of thumb is to save enough cash to cover 3 to 6 months' of essential expenses. If you are still working and have some extra cash, you may want to put away a bit more.
Read Viewpoints on Fidelity.com: How to save for an emergency
How to find the extra cash? You may be surprised how quickly sheltering in place can generate savings from foregone travel, dining, and entertainment. Also, you may want to review recurring expenses, like memberships or commuter passes that could be put on hold to raise some extra cash to prepare for the unknown. And if you are expecting a tax refund, consider filing early, which you can still do since the tax filing deadline was extended to July 15.
Finally, if you get a payment under the CARES Act, consider using some of it for your emergency fund. Most individuals earning less than $75,000 will get $1,200 (couples $2,400), and families will get an additional $500 per child. The payments start to phase down after $75,000 and disappear completely for people making more than $99,000 and couples making more than $198,000.
2. Consider refinancing—or extra payments on some loans
If you have a mortgage, student loans, or high-interest credit cards, you may want to take a look at refinancing your debt to lower your monthly payments. Interest rates have moved sharply lower during the current crisis.
"There has been a lot of demand for mortgage refinancing since rates moved lower," says Can Lu, a director in Fidelity's financial solutions team. "Refinancing could be a great opportunity to reduce expenses in a time of economic uncertainty. But you need to shop around. Some lenders—some lenders have seen so much demand they have raised rates. If you are considering extending the payments over a longer schedule, be sure to consider the total cost of the new loan as well as the monthly payments."
When it comes to federal student loans, be sure to consider terms, such as the flexible repayment options provided with government student loans, as well as interest rates. Unlike private loans from banks, student loans from the government, like a Direct subsidized or unsubsidized loan, offer some flexible repayment options including the ability to switch your repayment plan at almost any time. If you refinance from a federal student loan to a private loan, you won't be able to take advantage of the repayment plans offered by the government. The stability of your income is also an important consideration.
The CARES Act also provided some relief to federal student loan borrowers with Direct loans or Federal Family Education Loans (FFEL) that are owned by the US Department of Education. Payments on these loans and interest are paused through September 2020. (Note: This does not apply to private loans). If you're able to continue making payments on your federal student loans, you can do so. Plus, you can make extra payments during this time. Because interest will not be accruing for 6 months, you'll be able to put all of your payments toward principal, which may help you pay down those loans faster.
If you don't qualify for any of the federal loan relief provisions you may consider refinancing your student loans as a way to reduce payments.
If you hold credit card debt with high interest rates, the current interest rates may make it a good time to refinance. You may be able to use a home equity line of credit or a personal loan to refinance your debt at lower rates. In some cases, a new credit card may offer a lower rate.
3. Invest with discipline or with help
If you are saving and investing for a retirement that may not begin for decades, it makes sense to take the long view of the market pullback. That means, instead of panicking and selling when the market drops, choose a mix of investments based on your timeline, goals, financial situation, and feelings about risk and then stick to that long-term approach.
Remember that over long periods of time the US stock market has gone up, despite many periods of dramatic selloffs. Consider the chart below that shows all of the market pullbacks since 2008. Each blue bar represents a market selloff of at least 5%. Even the 2008 financial crisis, when stocks fell nearly 50%, was just a bump in the road for the stock market with a long enough perspective. The past is in no way a guarantee of future performance, but at the time, stocks suffered a sharp move down. And many investors may have considered trying to sell stocks to avoid losses. However, over the course of decades, it became a small blip in a long uptrend.
If you don't feel comfortable or capable of managing your portfolio through volatility on your own, you may want to consider products or services that can help. You could work with an advisor. Or you could check out a robo-advisor. A robo-advisor is a low-cost, digital financial service that uses technology to automatically manage an investment account. A hybrid robo-advisor is a financial service that combines a professionally managed account (through the help of a robo advisor) with the added benefit of affordable, direct access to professional financial advisors who could could help you manage your financial life.
4. Consider saving more and rebalance
If possible, you should use the downturn as an opportunity to invest. If you are financially secure and have savings to cover an emergency, that could mean increasing the amount you deduct from your income to save for retirement until you hit the maximum for workplace savings plan contributions. If you have not made your 2019 IRA contributions, you still can since the deadline for contributions was extended to July 15. You could also make your 2020 contributions now, instead of waiting until the end of the year.
You could also consider rebalancing back into stocks. For example, say your investment strategy calls for about 75% stocks, and 25% bonds and cash. During the downturn, your asset mix may have moved away from stocks. You could reallocate back to your mix. You could also rebalance by directing any new contributions into 100% stocks until you reach your planned mix of investments. That will help rebalance your portfolio over time, and position you to benefit from any potential recovery. But it is important to remember to regularly revisit your contributions as part of an overall financial review, in case you need to adjust your contributions now and again in the future to stay on track for your plan.
5. Explore tax-loss harvesting opportunities and upgrade your portfolio
A realized loss on the sale of a security can be used to offset any realized investment gains, up to $3,000 in ordinary income annually. If you will have taxable gains this year, and you have unrealized losses on investments that are currently worth less than when you bought them, you may want to sell them for a loss to lower your tax bill. If you choose to implement tax-loss harvesting, be sure to keep in mind that tax savings should not undermine your investing goals. Be sure to comply with Internal Revenue Service (IRS) rules on wash sales and the tax treatment of gains and losses.
If you have a financial advisor, they may already be doing your tax-loss harvesting. If you're doing it yourself, it's always a good idea to consult a tax professional.
Read Viewpoints on Fidelity.com: How to cut investment taxes
The bottom line
If you are still working and saving for the future, a downturn can be unsettling, but it shouldn't be a reason to panic. It may present an opportunity to review expenses, to try to boost your savings, to revisit your contributions, and invest in light of recent market action. Overall, if you have a solid plan based on your situation, sticking with that approach even through the scary times is a best practice.