COVID-19 Was Your Retirement Plan Test?
April 19, 2020
Countless Americans are worried about the impact that Covid-19 will have on the health of their families and friends, and indeed their own well-being. However, there is another concern that could impact you.
In preparing for retirement, investors should prepare for all sorts of investment environments, and that includes downturns like Covid-19. While it may seem out of the ordinary, remember that it has been less than 15 years since the last financial downturn, and while the growth seen over the past ten years has been substantial, it is now clear that it is sandwiched between two bear periods.
Therefore, it is all the more crucial that your retirement plan be prepared for any such eventuality. As painful as one as it has been, Covid-19 is just a test for your finances. Here’s how to check to see if you’re ready.
Diversification is Key
Although many securities are doing poorly right now, there are others that are doing well. Many mail-order retailers, healthcare stocks, and PPE manufacturers are seeing high earnings. Even traditional publishers are seeing an increased demand for books. Plenty of companies stand ready to make substantial profits as a result, and given that it is on a sector by sector basis, diversified portfolios are likely seeing substantial stability.
It is not just about stocks, however. Fixed income, alternative investments, currencies, and commodities have all also seen considerable volatility over the past few weeks, but through that volatility there has been a number of opportunities to gain considerably. Not all of these will be immediate, of course; some may pay considerably in the future. At any rate, diversification is a step that helps you accomplish all of this.
Appetite for Risk
More than just a need for diversification, Covid-19 has also informed a need for knowing what one’s appetite for risk is, no matter what the market conditions may be. Doing this must be done not only with an eye to the future, but with an eye to the individual appetites of the investor in question.
After all, different investors will have different appetites. Some investors may have no problem riding out a storm like Covid-19, confident that the market will prevail. Others, especially those who rely on more actively managed portfolios, may wish to fall back to a safe harbor during such a situation.
The goals of each investor, as well as his/her time left in the market, each play a large role here. Someone who is close to her financial goals may not want to risk eroding what she has gained over the years. Likewise, an investor who is younger and has the benefits of time and compound interest may well wish to search for greater rewards.
At any rate, solid communication and a good plan will help make sure that you are prepared to meet the market on your terms. Rather than treating Covid-19 as a one-off occurrence, by addressing it as a potential market fluctuation that could happen again, you will be better suited to handle it in the future, knowing what could well come as a result, and preserving your net worth regardless of what goes on around you.