On March 23, 20020, the DJIA plummeted to 18,591 from 29,232. As of December 8th, the DJIA has hit a record level of 30,218. If you had sold all your stocks on March 24, you are probably crying by now. Furthermore, there is continued speculation of another impending stock market crash. Protect your retirement fund and investments by following these strategies for investing during a crisis.
Dollar Cost Average
If you have a 401k/403b through your employer, you may be using this strategy already. By investing your pre-tax money at regular intervals throughout the year, some times you buy at a discount and some times you buy when the market is high. It decreases the chance of you buying high and selling low by averaging it out. Contributing by dollar cost averaging is an excellent strategy for investing during a crisis because chances are that you’re buying low.
Another reason why dollar cost averaging is a good strategy for investing during a crisis is that you don’t have to think about it. You contribute regularly without thinking what the market is doing.
Invest throughout the whole year to ensure you’re getting your employer match each quarter.
Invest in ETFs and Mutual Funds
JCPenny | J. Crew | Neiman Marcus | Souplantaion |
Pier 1 Import | GNC | Chuck E. Cheese | Brooks Brothers |
Sur La Table | Ann Taylor | California Pizza Kitchen | Sizzler |
Ruby Tuesday | Rubio’s | Friendly’s Restaurants | Gold’s Gym |
Hertz | Le Pain Quotidien | 24 Hour Fitness | Cirque du Soleil |
These are undoubtedly the companies that many of you recognize but they’re gone. They all filed for Chapter 11 bankruptcy. I mean CPK, really? How? That was one of my favorite place for pizzas and salads.
It is certainly a dangerous and sad time for some companies. Does this mean you should sell all your stocks, mutual funds, and ETFs? Not at all. Investing during a crisis strategy is to stick to mutual funds and ETFs, instead of buying individual stocks.
Total Market Mutual Funds and ETFs
Total stock market funds such as VTI has over 5000 holdings and investing in it is a good way of diversifying.
If you work in a hospital, you’re more likely to have several mutual funds to choose from versus individual stocks or ETFs. In this case, find a mutual fund that closely resembles the S&P 500 or total market fund.
High Dividend Yield Funds and ETFs
Dividend yielding stocks and funds pays you dividends. Let’s say you own VTI, which pays 1.5% annualized yield. If the ETF drops by 5%, it’s actually 3.5% since you already collected 1.5%. Vanguard High Dividend Yield Index Fund (VYM) holds 440 companies and pays an annualized yield of 3.2%. This is a better return than you’ll get at any bank. Your strategy for investing during a crisis should include high dividend yield stock funds.
International Funds
In addition to buying ETFs and mutual funds, another way to diversify is to invest in foreign markets. Established foreign market includes Europe while emerging foreign market include companies from Brazil, Russia, India and China (BRIC). The reason that it’s important to invest in international funds during a crisis is that some of these countries may recover faster than others. The recommendation is to invest from 5% for conservative investors to 25% for aggressive investors.
Diversify
Different Sectors
Invest in different sectors, such as real estate, precious metals and energy. The energy stocks haven’t done well this year but that means it’s at a discount. Once the covid pandemic dissipates, and it will, people will need to return to work and the gas price will go back up. Strategies to investing in a crisis include diversifying in different sectors.
Market Capitalization
Invest across large cap, mid cap, and small cap companies. In general the large cap funds gives you stabilization while the small cap can give you better returns. They’re more nimble and have the potential to go up higher and faster. Just remember that Amazon and Tesla were once small cap companies. Imagine how much money you would have made if you had invested in them while they were small.
Real Estate
One of my favorite strategies for investing during a crisis is buying real estate. Thirty percent of my total asset is in real estate. If you don’t have the capital or want to deal with tenants, you can buy real estate investment trust (REIT) within your retirement fund or investment portfolio.
Precious Metals
Gold and silver have increased in popularity for the last six months. When stock prices decrease, the value of precious metals go up thereby reduces the volatility and risk of your portfolio. If the stock market crashes, you can sell gold or silver while you wait for the market to rebound. It’s recommended to hold 10% of your net worth in precious metal as part of a strategy to investing during a crisis. It’s also a hedge against inflation. They can and are printing more money whereas they can’t print more precious metals.
Anticipate
Unemployment is at 6.7% (U.S. bureau of Labor Statistics), which translates into 10.7 Americans. In addition, an estimated 3.4 million homeowners were in forbearance as of September 2020. (Mortgage Bankers Association mba.org). While working as an operating room nurse, I learned that the best nurses are the ones who can anticipate the surgeon’s next move. Knowing the facts about the current economy, I would anticipate a longer period of recovery from the pandemic or recession.
Recession Resistant Industries
While investing during a crisis, include recession resistant industries in your portfolio. People still need to eat, use utilities, communicate with one another, and go see a doctor. Here are some recession resistant index funds to consider:
- Consumer staples: Consumer Staples Select Sector SPDR Fund (ticker XLP)
- Utilities: Fidelity MSCI Utilities Index ETF (FUTY)
- Telecom and communication: Fidelity MSCI Communication Services Index ETF (ticker FCOM)
- Healthcare and Biotech: Fidelity MSCI Health Care Index ETF (FHLC)
Real Estate
Just as you’ve heard rumors of impending stock market crash, many economists anticipate a real estate market crash. If the housing prices decline, it may be an excellent investment opportunity. See post on real estate investing.
Stay in the Game
Don't Panic
Do not sell after the crash. You are too late.
I’ve lived through 3 financial crisis. The first was in year 2000 with the tech bubble when Nasdaq lost almost 40% of its value. The 2008 housing crisis caused another stock market dropped more than 50%. And we all witness the most recent decline in the stock market of 30% over night due to the coronavirus pandemic and the lockdown that followed.
Continue to Invest
The last one was particularly hard for me since I just retired. What did I do? The same thing I did with each crisis, which was nothing. I stayed invested, diversified, and continued to increase my retirement nest eggs through dollar cost averaging.
Many of my colleagues got out of the market after the 2008 crisis and never got back in. I followed these strategies for investing during a crisis and retired early while they are still working.
While it is better to sell before the crash than after, no one can predict exactly when. It may rally and gain massively before it crashes. It is better to stay in the game.
Stash Cash Aside
If the pandemic has taught us anything, it’s taught us that we need cash reserve. If you have been laid off or furloughed due to the lock down, the emergency fund would have saved you from moving in with your parents.
What would you do if your crystal ball told you that March 23 event is occurring again tomorrow? Would you wish you had some cash to buy stocks at a 30% discount? In light of speculation of impending stash market crash, you can’t time the market but you can anticipate one. Stashing cash aside allows you to invest during the market downturn. Buy low so that you can later sell high.
“When written in Chinese, the word crisis is composed of two characters- one represents danger, and the other represents opportunity.”
-John F. Kennedy