Between Mercury retrograde, Coronavirus, and Friday the 13th, Pisces season has been ROUGH.
Lots of people have been wondering about the activity in the financial markets, and how these changes might affect them. While we don’t have a crystal ball, here’s 5 Myths About the Economy and Coronavirus that we’re ready to bust:
Myth #1: “This is the Great Depression / ‘08 Recession All Over Again”
Truth: Yes, the markets have gone haywire. No, we don’t know what will happen in the future.
To recap:
- The Dow Jones experienced its biggest drop since 1987.
- Energy markets took a particularly harsh beating – U.S. Brent crude oil (the benchmark or “standard” for oil prices) fell to $33 / barrel. This was the biggest weekly drop in oil prices since 2008.
- There was across the board sell-off in all asset classes, and the downturn was felt across exchanges worldwide (Toronto Exchange fell 12% and was the worst fall on record since 1940).
However, not everything is doom and gloom. Financial crises take more than one week to develop. While it is impossible to predict the future, here’s two helpful things to keep in mind amidst the panic:
- Central banks worldwide have responded swiftly to help avert a potential crisis. The Fed announced an interest rate cut – this move is considered a stimulus to the economy, because low rates provide a boost by encouraging businesses to borrow, invest, and spend. In addition, governments worldwide have taken measures to ensure that local banks have enough cash on hand to back loans and credit lines, thereby keeping them afloat – and, most importantly, your money safe.
- Financial markets today are fundamentally more stable than they were during the last two major crises. Bucketloads of regulation have been implemented to keep consumers safe, and to prevent chaos from permeating the markets the way they did in 2008.
Action: Keep Calm and Carry On. In the coming weeks and months, markets will be severely tested, as firms weigh layoffs in light of many of the “social isolation” policies that much of the country has implemented. This could be an important catalyst for future market events. In the meantime, instead of panicking, try doing these 3 things:
- Continue washing your hands.
- Reconnect with your finances and set goals – honestly, when was the last time you peeked at your savings account? No shame in the game if you have forgotten your username / password (*raises hand*). If you’ve been neglecting your 401k, credit card statements, insert financial obligation here, use this time to log back in and see what’s going on.
- Check in with your family. Are they healthy and taking care of themselves? How is their financial situation? If you’re in a good spot financially, now might be a good opportunity to step in and have an honest conversation with your family about money.
Myth #2: “My 401k is Totally f&$%ed”
Truth: If you’re not retiring in the near future, your 401k is fine.
Yes, if you log in and check the current balance, it will probably be lower than you remembered. No, this is not a cause for concern. 401ks are long-term investment vehicles. You have decades to recover from this point in the markets, and right now, your contributions are going to go even further because stocks are even cheaper.Action: Do NOT:
- Cash out your [401k] and invest in gold, cryptocurrency, or your friend’s cousin’s sister’s CBD company.
- Stop making contributions to your 401k. Contributing your 401k is probably one of the most important financial investments you can make for 2 reasons:
1. The money you invest today will compound to be worth a lot more when you’re 65. 2. You’re going to need a lot more money than you think to live comfortably. DO:
- If you have a 401k – nothing. Seriously, leave your 401k alone.
- If you don’t have a 401k – consider opening a traditional or [Roth IRA]. If you already have one, make contributions there.
- Discuss estate planning and retirement goals with your parents. Are your parents eligible for retirement this year, or considering drawing down on their distributions this year? Now is an excellent time to educate yourself (and them) on what this means. There are many (free) educational resources available. Lastly, a written legacy plan / will is the greatest gift your family can give you. Talk to them.
- Wash your hands – seriously y’all, keep we can’t stress this enough.
Myth #3: “My money is safer underneath the mattress.”
Truth: Keep your money in the bank, where it belongs.
If you grew up with parents who are immigrants, you probably know what we’re talking about. In Russian it’s called Чёрный день (“the black day”). It’s pretty much a rainy day fund that you keep away from banks, under a mattress or, more likely, in a shoebox somewhere. If your parents grew up in periods of major economic instability or inflation, they will understand this. Of course you’re going to want to keep your money away from banks when your experience with banks is a place that loses, and doesn’t protect, your hard-earned cash.
Mattresses, shoeboxes, and dollar bills are highly flammable. The U.S. government ain’t new to this, it’s true to this, and the FDIC was created in the wake of the Great Depression to guarantee your reserves up to $250,000. No matter your political views, one thing is unequivocal – the stability and strength of the U.S. financial markets. Thank you, Alexander Hamilton.
If you think that the economy is “broken” because of the recent volatility, rest assured that the market reaction is actually a sign that things are working quite well. Let’s take the drop in oil price as an example. When people are self-isolating, they’re not driving or flying around a ton, and airlines are cancelling flights in response. Cancelled flights = airlines flying fewer miles = a major consumer of oil (airlines) no longer needing all that oil = oil being less necessary so…prices come down! Voila. Supply and demand at its finest. The markets are pricing in these new economic realities – they’re not broken, they’re actually kind of cool.Action:
- Don’t panic
- Check in with your risk tolerance (aka that feeling in your stomach – or lack thereof – when you hear bad news in the markets)
- Make sure your investments are well-diversified.
If you’ve been dabbling in trading, consider these wise words from Benjamin Graham, the famed value investor: “The primary reason many individuals fail as long-term investors…is that they pay too much attention to what the stock market is doing currently.” We’re living in chaotic times, and when this becomes front and center in every source of information you confuse, it’s human nature to feel things – fear, anxiety, worry. When you sense that these feelings are starting to overwhelm you, or cloud your judgment, take a stake back and remember that thoughts aren’t facts.
Myth #4: “I shouldn’t buy that house now.”
Truth: It depends.
How old are you? What are your financial goals? You should avoid making rash financial decisions based on sudden market swings. Saving for a large investment – such as a home purchase – requires patience, time, and discipline. “Intelligence consists of patience, independence and self-control,” per our friend Benjamin Graham (low-key patron saint of this week’s issue).
If you’ve been saving for a down payment, take solace in the fact that the latest rate cut announced by the Fed will hopefully trickle into lower mortgage rates. While this may help you make an informed decision regarding mortgage lenders – only you know when the right time will be.
Action: Refrain from trading in volatile markets if possible. Most importantly, look beyond the short-term volatility and remain focused on long-term investment objectives. If you don’t have financial goals already, now is an excellent time to start crafting them, and committing to regular check-ins – weekly, monthly, quarterly, or whatever schedule works for you – to make sure you are on track. If your parents or family-members are approaching retirement, it may be worth discussing whether to forego large purchases to a later period, when the markets have stabilized.
Myth #5: “Now is a bad time to invest.”
Truth: Are you kidding me? The current market environment is a lot like walking into TJ Maxx and seeing that the entire store is on final clearance.
Action: We’re not saying you should quit your job and become a day trader, however, if you’ve ever had an interest in learning more about finance but never knew where to start, now couldn’t be a better time to start. So much is happening in the markets, that just by reading the news daily, you’ll become much more financially savvy.
Times of economic distress are excellent opportunities to see what companies really are made of, how capable the decision-makers in charge of, and the true value of the good or service being offered.
Tip: if there’s a company that you’ve always just “liked,” start tracking their stock price. See where it goes from now, to 6 months from now, and then 1 year. Even if you don’t invest, you will become so much more financially literate by just keeping track of what the firm is doing.
There’s a lot of concepts in here that are new, that you may have heard before but never quite understood, or maybe some you already know. Our goal is to demystify what’s going on in the world of finance, explain it in layman’s terms, as though you were talking to a friend.
Comment below on financial topics you’re interested in learning more about!
