March 2020 will be remembered for ushering in a whole new world for investors. As of this writing:
- The S&P 500 is down 28% from its late-February highs.
- The number of Americans diagnosed with COVID-19 has jumped from 75 on March 1st to over 53,000 on March 24.
- Several states are demanding residents stay home except for essential travel.
With each passing day, the situation is changing dramatically. That has led to calls for various measures that would have seemed preposterous just a few weeks ago.
And yet, here we are. Among those drastic measures: Temporarily closing the stock market. If that should come to pass, what would it mean for investors -- especially beginning investors?
Image source: Getty Images.
Don't just do something, sit there!
Of course, the famous line is: "Don't just sit there, do something!" With investing, this dictum is often turned on its head. In investing, it's actually better to "sit there" rather than "do something." That's because the stock market has been the greatest wealth-generating machine the world has ever seen.
Often, we believe we can "time the market" by buying and selling when specific events take place. All too often, we are proven wrong. That's why the best investing advice is often the simplest: Buy-and-hold is boring, but it's also got the best track record.
At the same time, it's necessary to acknowledge that we're human: Even if we have no intention of selling our stocks, not having access to them at all isn't comforting. Here's a quick guide on what you should -- and shouldn't -- do if the stock market announces it's closing.
Don't: Sell high-quality companies out of fear
We'll start by calling upon Warren Buffett, who is not only the world's most widely celebrated investor, but one of the greatest sources of pithy wisdom.
Among his quotes, two would directly address the situation we find ourselves in today:
I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.
and
If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes.
No one is talking about closing the stock market for five years. In fact, there's a chance we'll never even get to that point. But if the idea scares you a little, reread these quotes.
If the under-lying businesses you've invested in are high quality, and can withstand an economic downturn like the one we're entering, you should be optimistic. As I outlined earlier this month, companies with wide-moats and solid balance sheets will get stronger relative to their competition in a downturn. When the economy starts to recover, they will be able to capture even more market share.
Keep your eye on the long-term gains such businesses can make and you'll thank yourself years from now.
Don't: Invest any money you'll need over the next three years
Over a long enough time frame, investing in the stock market has always been a winning proposition. But ask any investor what the Dot Com Bubble popping -- or the Great Recessions setting in -- felt like and they'll tell you: it was ugly.
As our co-founder and Chief Rule Breaker David Gardner is so fond of saying: "Stocks go down faster than they go up, but go up more than they go down." The only way to tip the scales and make sure you come out on the winning side of that combination is to know the money can stay there for a minimum of three years.
That's why it's important to carefully calibrate any major purchases you might be considering (a new house, paying for college, drawing down your retirement savings for living expenses) and ensure that you'll have that money on hand. It's also why building up an emergency fund -- which can replace your income to meet basic needs for three to six months -- is so important.
When these things are in place, you can rest at ease with your financial position -- whether the market is open or not.
Do: Make sure you have enough money on hand to meet your immediate needs
If you look at the section above and realize that you might not have an emergency fund set, now is a good time to take action.
But that doesn't mean necessarily selling your stocks. Once you do, any losses you experience are locked in -- and there can be significant penalties associated with withdrawing from tax-advantaged accounts early.
In such a time, it's worth getting creative:
- Can you cut down on non-essential purchases to help raise funds?
- Would it be possible to take on a side-gig -- especially with all the extra time you'll be spending at home?
- Are there things around the house you don't need that you might be able to sell?
Everyone's situation will be different, and such steps might not be enough to cover the gap between the cash cushion you have and what you believe will be necessary. For some, that will likely mean selling stocks.
If so, be sure to talk to your tax professional to make sure you are minimizing the extra penalties you might incur for doing so.
Breathe!
It isn't an easy time to relax. Even outside of investing, the world is dealing with a new disease that we know very little about. That said, unabated worry never strengthened one's immune system -- let alone their retirement portfolio.
If the market does temporarily close in the future, you'll be glad for taking pro-active steps now. Evaluate your cash position, get creative, and keep your eyes focused on the long term. That's what you have control over. Then -- find a hobby and get really good at it with your extra time!
