I recently was asked a question by a woman in her late 20s who wants to start an investment account.
She asked, “Is this a good time to start investing?”
In today’s article I address what a new investor can do now, and what a seasoned investor can do.
New investor
The question was posed in response to the economic uncertainty caused by the COVID-19 virus and the volatility of the stock market since February 2020.
There is always uncertainty in the stock and bond markets, and we cannot control the short-term performance of the markets. When we are in the midst of an economic downturn, it always seems harsh. Looking back, the economic crisis from COVID-19 will be compared to the financial recession of 2008, when the S&P 500 declined 54%. As of May 15, the S&P 500 is down 11.4% in 2020. Will it decline further? Will it recover quickly? We do not know.
However, it is always a good time to start an investment account, so the answer to the question is “YES.”
However, before investing, a person must first have an emergency fund that will cover living expenses for at least four months. If you do not have that in place, focus first on building your emergency fund.
If you have your emergency fund, then start an investment account. I do not recommend any specific brokerage firm or investments. There are several local firms and many online brokerage firms. As for the investments you choose, I recommend starting with a balanced mutual fund with equity percentage ranging from 40-60% and the remainder in fixed income (bonds). I always recommend choosing a brokerage firm that offers mutual funds (or Exchange Traded Funds) with very low expense ratios, very low fees for buying or selling, and with no annual fees. You can set up automatic investing between your bank account and the brokerage firm so $50, $100 – or whatever amount you choose – goes into your investment account each month. Whenever you receive a tax refund or have extra money, deposit it into your account.
Seasoned investor
This section pertains to you if you have several investment accounts, or if you only have a retirement plan through your employer, such as a 401(k) or a 403(b).
My advice depends on whether you understand what your target asset allocation is (the percentage of equities and the percentage of fixed income), and whether you believe your investment accounts were appropriate for your goals and your tolerance for risk before the COVID-19 crisis began.
Below are four strategies to consider if you believe the asset allocation within your investment accounts are appropriate:
• In a taxable account, look for opportunities for tax loss harvesting. This involves selling a mutual fund (or ETF) that has a taxable loss, and replacing it with a similar (but not identical) fund immediately after. The result is that you “harvest” the tax loss to be used to offset long-term capital gains on your 2020 tax return. If the taxable loss exceeds your long-term capital gains in 2020, you can apply $3,000 of the remaining loss against your 2020 ordinary income, and save any remaining tax loss for future years. • If you have some investments that were not performing well before the downturn, consider selling them now, and clean up your investment accounts. • If you have a concentrated stock position, sell some of it now so your risk will be lower going forward. • Consider rebalancing your account. As a hypothetical example, an investment account that was 50% equities and 50% fixed income before mid-February may now have an asset allocation of 45% equities and 55% fixed income. Experts recommend rebalancing once or twice a year, or whenever your account is 5 or 10% low or high in equities. There is not clear evidence regarding when it is best to rebalance, as long as you establish a system that you will follow.
If you suspect your investment accounts were not appropriate for you before the crisis – especially if you believe they were too aggressive – then make changes now so they will match your goals and tolerance for risk going forward. Likewise, if you believe the costs within your investment accounts are too high, or your accounts are not diversified, this is a time to make corrections.
The COVID-19 crisis has been devastating in many ways. The death toll is high, many people are out of work and are struggling to buy food and pay bills, and our economy is severely impacted.
We need to count our blessings if we are healthy and are not suffering financially. It is a time when giving generously to the charity of your choice (or neighbors and relatives) is very much needed and appreciated. Neuroscience research has shown that reward centers in our brains light up when we give to charity.
In essence, doing good feels good. Therefore, give generously, and stay safe.
Donna Skeels Cygan, CFP, MBA, is the author of “The Joy of Financial Security.” She has been a fee-only financial planner in Albuquerque for over 20 years, and is the branch manager for the Mercer Advisors office in New Mexico. Contact her at dscygan@sagefuture.com.
"emergency" - Google News
May 25, 2020 at 01:02PM
https://ift.tt/3c7A3rz
Get emergency savings in order before investing - Albuquerque Journal
"emergency" - Google News
https://ift.tt/2VVGGYQ
https://ift.tt/3d7MC6X
emergency
Bagikan Berita Ini
0 Response to "Get emergency savings in order before investing - Albuquerque Journal"
Post a Comment