Investing During This Market Downturn? Make These 5 Considerations First

March 11, 2020 brought the end to an historic 11-year bull market. Now, 20-30% off recent all-time highs¹, seasoned investors are taking this as an opportune time to add to their portfolios.

If you’re wondering if now’s a good time to invest, start by taking these considerations into account.

Why Invest During a Recession?

Choosing to invest during a market downturn usually makes a lot of sense - equity prices have fallen, meaning those willing to invest now can likely get stocks and other equities for a fraction of what they were worth last month. Cue the overused quotes from Warren Buffett about the market being a transfer of wealth from the impatient to the patient.

Those who are still 5 to 10 years (better yet, decades) away from cashing out their portfolios for retirement can really benefit from this downturn in the market.

Consideration #1: Is My Emergency Fund Adequate?

Record numbers of Americans are filing for unemployment.  We are still early days into this crisis, but if we look back to the 2007-2009 recession, unemployment rose to five percent at the end of 2007 and up to nine and a half percent in June 2009. Unemployment actually didn't peak until after the recession ended, at 10 percent in October 2009.² 

Even if your job is secure and stable, it doesn’t take a genius to look around and see how important an emergency fund is. Things can change for you, and they will. There is no telling how, why, or when, but we know that the only constant in life is that it will continue to change. An emergency fund gives you the financial flexibility to weather those changes without changing your lifestyle.

This is why we use a 4-6 months expenses as a general rule of thumb for our financial planning clients's emergency fund. Yes, I know that you came here to read about which stocks to pick, but you WILL have to sell those stocks at the wrong time in the future if you do not have an emergency fund.

Once that’s taken care of, then you may be ready to turn your focus toward investments.

Consideration #2: Am I Better Off Paying Down Debt?

In the fourth quarter of 2019, the NY Fed reported that American household debt rose to $14.15 trillion.³ While the majority of this debt covers things such as housing, auto loans and student loan payments, this still leaves $46 billion in credit card debt.³

If you find yourself in the position of choosing between paying down debt or investing, there are plenty of factors to consider, and this would be something to consult with your financial advisor about. There is absolutely no way to tell what investments will do in the short term, so please do not invest money that you may need in the next 5-10 years.

Consideration #3: Am I Rushing Into This?

Emotional investing, be that positive or negative emotion, tends to fail. Emotional investors rush in euphoric and rush out disappointed. In too soon, out too soon. You get it.

Our last recession, for example, lasted 18 months.⁴ What does this mean for an investor eager to jump in? It means you have time. You can speak with your financial advisor and discuss the pros and cons of investing during this downturn. There’s no need to make a hasty, emotionally driven decision by tomorrow. While the markets will continue to fluctuate, they’re not recovering overnight.

Warren Buffett has quoted the great Benjamin Graham on this many times:

"In the short-run, the market is a voting machine, but in the long-run, the market is a weighing machine"

What I'm saying is if you're going to gamble, go to the casino. Investors do it for the long-term.

Consideration #4: Am I Emotionally Prepared to Watch My Money Drop?

If you choose to buy while the market is in a downturn, there’s a high chance that you will buy before we hit the bottom. This means that you need to be prepared for the volatility. Record volatility, at that.

There is no way to time the market. So you need to be willing to wait for those returns. Investing is a long, slow game that rewards those that are patient.

Consideration #5: Am I Still Following My Normal Investment Procedures?

Don’t treat the tempting prices of investment opportunities as a chance to forego your investment strategy or plan. This is a time in which you’ll want to be precise and logistical about the next investment decisions you make. I can relate here. I LOVE getting to know a new company. Their story. The financials. However, you want to evaluate your portfolio as a whole - your 401(k), IRA, brokerage accounts, all of it - and build one that works how you have planned.

So, this probably means that the best investment you can make is buying more of something that you already own. In addition, you’ll want to work with your advisor to maintain diversity and keep risk with your tolerance. Together, you can be sure that these changes in your portfolio reflect your long-term financial goals.

- Schad TenBroeck, Sequoia Financial, LLC, A Registered Investment Advisory