How to handle investments, insurance during uncertain times
The coronavirus pandemic is expected to put a dent in many retirement and investment accounts, and the fate of the stock market is as uncertain as that of the virus.
But there are strategies for handling your investments during this uncertain time while also taking advantage of lowered insurance rates.
Here's what you need to know to protect and build for the future.
Know your tolerance risk, consult an expert
On top of being a public health threat, coronavirus also became a threat to the stock market.
In March, stocks plummeted and many people with investments did what they often do in a market crash: They made emotional rather than rational decisions and sold their stocks "at the worst possible time," said Richard Jakotowicz, a finance professor at the University of Delaware.
Despite the market improving since then, some are still anxious and wondering whether it's time to sell their stocks because they don’t know how long the pandemic will last. They're also fearful that the crash in March might repeat itself in the near future, Jakotowicz said.
But what you need to do now with your investments depends on your tolerance risk.
"Someone who’s 20 years old and is going to be investing for the next 40 or 50 or 60 years, they have a high tolerance," said Jakotowicz, who also owns a financial planning practice. “No matter how scary things are today, if you just keep saving money and investing, by the time you retire, you will have grown your wealth."
Someone who is 60 years old and thinking about retiring won't have as high a level of risk-taking, he said.
"For the 60-year-old, you have to dial the risk back," he said. "Everyone’s different here. For some people it means only having half of your money in the stock market versus that 20-year-old who might have all their money in the stock market."
Jakotowicz recommends that people who need guidance on their investments seek help from a certified financial planner. He said that he saw a surge of new clients at his own practice once the pandemic began.
"Out of nowhere, a lot of people who thought they were invested properly have had an event that made them realize they’re not invested properly," Jakotowicz said. "There’s a certain point where people need to recognize what they don’t know and seek the help of a professional."
Delaware Treasurer Colleen Davis also recommends working with your plan administrator to find the best options for your investments.
"Instability in the financial world can easily add to the stress we’re all feeling," said Treasurer Colleen Davis. "There’s no way to predict how markets will perform. While knee jerk reactions to market fluctuations are understandable, it’s important to consider staying the course with a well-diversified portfolio."
The federal stimulus package that Congress passed to provide financial aid during the pandemic does include some relief for those borrowing from retirement plans, Davis said. That includes waiving some penalties for withdrawing money from individual retirement accounts and defined contribution plans, such as a 401(k) or 403(b).
'Perfect time' to shop for insurance
The coronavirus pandemic is the "perfect time" to shop for insurance plans, according to Delaware Department of Insurance spokeswoman Chris Haas.
That's because one of the side effects to the crisis has been a drop in insurance rates, since Delaware's state of emergency orders have caused residents to use their policies less often. That's leading to fewer claims paid by insurance companies, which has decreased their overall costs, Haas said.
For example, since hospitals have put elective surgeries on hold amid the crisis, health insurers are only paying out the emergency claims, she said.
Car insurers are reducing premiums for new customers due to decreased driving and fewer accidents and giving rebates to existing customers.
And since many of us are spending more time at home, that's led to us noticing and preventing issues such as burglary or a water leak that could otherwise lead to large homeowner and rental insurance claims.
Meanwhile, people across the country are considering and purchasing life insurance more often during the pandemic, resulting in a competitive market where many insurers are announcing discounts to win the new business, she said.
Delaware Insurance Commissioner Trinidad Navarro recommends comparing multiple quotes before purchasing a plan. If a price looks "too good to be true," you can use the National Association of Insurance Commissioner’s Consumer Insurance Search to make sure the company is legitimate, he said.
Delawareans should also research what their insurance companies are doing in light of the virus, he said.
Taking the emotion out of investing with a long-term plan
The field of behavioral finance studies the impact psychology and how the workings of the brain effect investor decision making. Investor psychology impacts the buying and selling habits of most investors. This is especially true when markets are approaching, or are at, the market’s peaks and troughs.
When markets are approaching a peak, investor emotions begin to influence decisions to an increasing degree. Investors tend to feel more positive about the future of the market. Feelings that nothing could go wrong, or that they don’t want to be left behind, are common. As a result, investors buy more as the markets rise. What is being purchased becomes more and more expensive, and a “bubble” can develop where one or more asset types are overvalued, sometimes to an extreme degree.
Eventually market fundamentals cannot support the market prices, and a catalyst, such as rising interest rates, a fraudulent event, geopolitical issues or just the realization that the assets are overvalued will pop the bubble and the market starts the normal downward phase of the cycle. It can happen suddenly or gradually. It could be a correction, or a full bear market. The creation of market bubbles and their eventual undoing unfortunately seems to be a natural part of investing, although there are ways prudent investors can work around this.
Investor psychology can impact the depth of the downward phase of the cycle just as it can influence the height of the peak. If the downward phase lasts longer than a few months, it’s not unusual for investors to feel uncertainty, fear and remorse over investing as aggressively as they have, and they feel threatened. It’s not unusual for investors to seek relief from their pain and look for excuses to sell their investments. When investors sell in large numbers during this period, the market can fall further than it would have without the emotional influence.
A study created by Dalbar, Inc., “Quantitative Analysis of Investor Behavior,” analyzed fund flow data from the Washington-based Investment Company Institute over 20 years from 1998 through 2017. The study found that average investor returns over this period were 5.29%, with a $100,000 investment for 20 years resulting in a total of $280,377.
Over the same period, the S&P 500 was up 7.20%. Holding onto that $100,000 investment for 20 years resulted in a total of $401,694, a difference of $121,317.
Why was there such a big difference? The analysis of fund flows indicated that when markets were rising, investors bought more mutual fund shares, and when markets were dropping, investors were selling their shares. Instead of buying low and selling high, investors were actually doing just the opposite.
Since down markets are a natural part of the investment cycle and such a common occurrence, it’s important for investors to learn more productive ways to handle their portfolios during inevitable bear markets and corrections than buying high and selling low. Among those strategies are diversification and a long-term financial strategy to keep emotions out of investment decisions.
Seek the advice of a financial advisor to help with your investment strategy, supply expertise, and help you accomplish your long-term financial goals. Good advisors have their eyes well over the horizon to anticipate problems and opportunities to help you be successful.
Based on the article “A Primer on Investing Through Market Cycles” by Ross Kronheim, CAIA, investment analyst, Securian Financial Services.