COVID-19 just about knocked everyone off their heels. The economy is all but shut down and the stock market crashed. With so much uncertainty ahead, it can be hard to stay financially sane.
At this point in time, I’m not a financial adviser so I can’t tell you what to do with your money, but I can tell you what I’m doing with mine. And that’s exactly what I’ll do in this article.
Keeping My Emergency Fund for Emergencies
It’s no secret that sound financial planning starts with an emergency fund that contains enough cash and/or cash equivalents to cover 6-12 months’ worth of living expenses in the event of an emergency.
That’s exactly what I’m doing. It can be tempting to raid that fund and throw it all into the stock market during a crash. While I’m fortunate to work for a virtual CPA firm that has been largely undisrupted by COVID-19, no one really knows how long this thing will last or the long-term ramifications it will have on the economy. Better safe than sorry as the saying goes.
This fund is sitting in an 11-month penalty-free CD at a popular online bank.
Sticking with My Retirement Plan
When the market crashes its tempting to panic and sell off all your holdings. But we know better. We know that the market will recover and will eventually soar to heights higher than the previous peak. It happens time and time again – markets crash then they rise from the ashes even better than before.
When it comes to retirement plans, It’s best not to meddle with them too much. Create a plan and stick to it. Even through down cycles – that’s actually the most important time to stick with your plan because you’re able to purchase assets at discounts.
At the time of this writing, I’m a little over a month away from turning 29 years old. That means I have at least another 30 years before worrying about traditional retirement. Even though my retirement accounts fell by around 30%, there will be more booms and busts between now and then, so I’m not at all worried. Its all part of the plan.
I will continue to make my monthly contributions to my 401(k) and Roth IRA and invest in low-cost index funds throughout this cycle and beyond. In fact, I’m actually increasing my allocations to buy-in at this crash.
Cutting Nonessential Spending
I’m taking a hard look at my budget and cutting all unnecessary monthly expenses until the crisis is over, and taking a hard look at any nonessential purchases I make during this time.
This is not in a panic, but to save and invest as much as possible during this downturn.
Savings for Real Estate
Before the crisis, my plan was to continue to save a much as possible to acquire real estate. That is still the plan because there will likely be opportunities to acquire real estate at a discount during this crisis. Real estate generally lags behind the market as it’s illiquid and sell-offs don’t happen with a click of a mouse.
But I’ll tell you, it’s really tempting to buy stocks with it!
Buying Stocks at a Discount
“Be fearful when others are greedy, and be greedy only when others are fearful.” – Warren Buffet
The market crashed over 30% due to the COVID-19 crisis. Crashes this big generally only happens once a decade, and it means its time to pick up quality stocks at a discount. That means companies that got beaten down by the crash but will be able to withstand the storm and return better than ever.
As stated above, I’m not deviating from my retirement plan. Instead, I’m going to take some of my savings from slashing expenses and start buying stocks in a taxable account. Before this, I didn’t really have a portfolio outside of my 401(k) or IRA. But crisis create opportunities, and here we are.
I’m going to pick these stocks based on the questions below, posed in this Motley Fool article, with the intent to hold them for at least the next 5 years.
- Does this company have the cash reserves/borrowing capacity to make it through the current crisis?
- Is the company in a business that will recover even if the economy enters a prolonged recession?
- How has management responded to changed conditions?
- Has coronavirus changed consumer behavior in a way that may become a long-term change?
As of right now, these are a handful of stocks on my radar. I’ll likely update this later with which ones I purchase and why.
- Berkshire Hathaway – Class B shares (BRK.B)
- Waste Management (WM)
- Visa (V)
- Bank of N.T. Butterfield & Son Ltd (NTB)
- CareTrust REIT (CTRE)
- Alphabet (GOOGL)
- Microsoft (MSFT)
It’s important to note that we may not have actually hit the bottom of the market yet – the market may still fall farther over the next few months. But that’s okay because I’m not concerned about how these companies will perform over the next few months, but rather over the next 5+ years.
As long as they have enough liquidity to weather the storm and are expected to return to normal, or better, after the crisis, that’s what I’m looking for.
The Bottom Line
It’s easy to panic during a crisis and makes irrational financial decisions. But it’s important to stay level headed, and instead, take advantage of the opportunities.
That means having an emergency fund because no one knows what the future may hold, not deviating from your retirement plan, and buying strong companies at a discount (or just buy an index fund).