Coronavirus Lessons for Investors
If you’re a beginning investor, it’s likely you’re concentrating on building your portfolio. But as important as it is to build that portfolio, you should also ensure that it’s diversified. The current market uncertainty caused by COVID-19 is a perfect example of why diversification is so important.
Why is a diversified portfolio so important?
There are three key reasons why diversifying is important:
- A diversified portfolio helps minimize risk. Stocks can be a risky investment at any time, but with a diversified portfolio, you can help minimize the risk by spreading that risk among a variety of investments.
- Diversifying can help investors maintain capital. Someone purchasing stock at the age of 30 has a much different investment goal than someone age 50. For older investors, it may be much more important to maintain capital than it is to increase capital.
- You’ll have a much better chance at generating dividends if your portfolio of stocks is diversified. When one stock is performing well, chances are that another stock has dipped. By having a significant investment in both, you’ll help to offset any potential losses from underperforming stock.
It’s also common for one particular type of asset to perform better over a specific period of time, depending on external factors such as
- Current interest rates
- Currency markets
- Current market conditions
But it’s also important to remember that while one investment may be outperforming others, the standard is that there is no particular investment that will continually outperform others over the long term.
But what is a diversified portfolio?
A diversified portfolio is one where investments vary, with exposure to one particular type of asset is limited. Diversifying can look like two very different things to young investors and those nearing retirement age. Young investors are much more likely to be comfortable riding out the peaks and valleys of their investment portfolio, while investors nearing retirement age are more likely to be interested in slow growth and more consistent performance without the volatility that more risky investments may face.
In order to truly diversify your investment portfolio, many professionals recommend that your portfolio consists of the following:
- Domestic Stocks. Stocks are perhaps the most volatile investment in a portfolio, but they also represent the best chance for growth. Short term investment in stocks carries the biggest risk, but stocks can also provide the biggest reward if they are held on to for a significant amount of time.
- Bonds. Considered less volatile than stocks, bonds can provide a shield against market instability created by stock investments. Stocks also typically provide regular interest income. For those looking for a more significant return, high-yield bonds can be purchased, but they also carry a higher risk.
- Money Market Investments. While ultra-conservative, money market accounts and similar investments such as a short-term CD can provide stability and safety that other investment options may not.
- International Stock. International stock can provide a higher return than their U.S. counterparts, but they can also carry a higher risk. However, for those looking to diversify their portfolio, international stock can be a good addition.
The key to diversification is to find the right balance between risk and stability and add accordingly, which allows you to reach your goals while also worrying less. In the wake of Coronavirus, and the potential long-term effects it will have on the markets, your ability to handle current market volatility depends on diversification.
With Coronavirus worries creating rapid changes in the markets, your portfolio construction can be the difference between continued growth or difficult losses. The markets will ebb and flow, but the secret to quality investing is not the amount of money in your account, but rather the quality of your portfolio. Your portfolio is the principal tool in which your financial advisor will work through and setting up a robust portfolio will be vital in handling market volatility. So, we thought it was time to touch on some of the ways in which you can build a portfolio that can handle market volatility.
- Figure out an objective
Your portfolio needs direction, or else what is even the point? Whether you are looking to invest in your retirement, or save up enough for your children’s schooling, you need an objective. This objective should be long-term, and big enough that it is something to work towards, but not so vast that it is unattainable.
- Limit Investment Turnover
Your portfolio is not something to play around with. Look at this way; you should not rent a stock. Instead, you should look to invest in a business. Yes, you can have some short-term investments, but the majority of your portfolio should consist of stocks that you are okay to invest and hold on to for up to five years.
- Be realistic and understand the ups and downs of the market
Investing in a low-yield stock and expecting it to triple in the first year is not going to happen, so why would you expect it? Instead, take the time to understand your investments and know what to expect in terms of return. This will allow you to ride the market during the highs and the lows and continue to keep an even keel over the long-term.
Investing is a long-term game, and betting all of your money on a single company over a five-twenty-year period does not make sense. Instead, look to diversify your investment across multiple blue-chip or up-start companies in several industries. Thus, if one market is struggling, one of your other companies will take up the slack until the market corrects. Simply put, diversification will allow you to continue to see substantial returns year over year.
- Talk to an expert!
Your financial advisor is here for a reason, and we can help build your portfolio to ensure that it can ride out market volatility. Our entire job is to help guide your portfolio and money to grow over time, and we are here for you!
No matter if COVID-19 has a continued effect, your financial advisor can help you navigate the daily ebbs and flows of the market. With your custom build portfolio, your money will continue to grow, even at the most volatile times.
During a crisis, you need answers, and your financial advisor knows this. It is a scramble to find the right information, and sometimes you do not even know whom to call. So, what do you do? Well, luckily for you, we have spent some time thinking about this and have come up with some of the most important things to do during a crisis.
Before the Crisis
First and foremost, you should chat with your financial advisor at your next meeting about their emergency contact plan, and what you should do. Ask questions such as if you are not reachable, who should I contact, and what is your preferred mode of communication during an emergency. As well, ask about what you should expect during the process, and if you need to do anything to assist them during the crisis. Most importantly, write these answers down and put it with your files.
Secondly, you should gather all of your documents and any other pertinent contact information and put them in your file folder. This will allow you to grab all the necessary information quickly, including the account numbers and contact information in case of a crisis.
During the Crisis
First, you need to take a breath and relax. Crises will come up, and the best person to help guide you through this process is your financial advisor. No matter if the market is in a bear, or has stopped trading altogether, let the experts handle the emergency. Simply put, you freaking out, or getting anxious is not going to have any effect on the market.
Secondly, take a look for your information docket, and find the contact information. Your financial advisor may prefer an email or a phone call, but either way, follow the emergency contact plan that they laid out with you. If you did not set up an emergency contact plan, try an email and then a call. Pay attention to the automated reply; it may have information about a conference call or other pertinent information.
Third, after you make contact, go about your day. Your financial advisor has your best interests in mind and will be able to navigate the market for you. Repeatedly calling or emailing will not help!
Finally, most financial advisors will either send out a mass email or arrange a conference call to go over the issues, and what they foresee over the next few days or week. This meeting will probably present an opportunity to have your questions answered, so prepare!
During a crisis, the last thing you want to do is panic. Markets ebb and flow, and although you might see a massive bear, the market will crater and get back to normal soon enough. As a client, it is tough to wait and see, but you trusted this financial advisor before the market went into a crisis, why would it change during it? Simply put, trust your advisor and reap the benefits when the market rights itself. Need help building a portfolio, or want a second opinion on your current set-up? Let’s chat!
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.