- With the stock market in a volatile state and speculation that a recession could be coming, what should you do with your money right now?
- Experts shared the worst and best case scenarios for four different options: investing in index and mutual funds, stock-picking, storing money in a high-yield savings account, or leaving it in a checking account.
- The overall conclusion among the experts is that if you don’t need your money soon, you should still invest in the stock market despite potential short-term losses – but if you need it in a year or two, you might want to be more conservative.
While the market has been on the rebound in the past few weeks, it’s enough of a scare to make investors wonder what they should be doing with their money right now.
“While a pullback is inevitable, markets don’t work on clear timelines,” Dan Egan, a market volatility expert and director of behavioural finance at Betterment, told Business Insider. “With talk of an impending bear market, it is easy for investors to listen to all of the noise and get nervous, but market drops are an expected part of investing.”
He added: “Accepting risk is how you earn returns.”
Keep in mind that experts generally advise against moving money in and out of the stock market according to highs and lows, otherwise known as timing the market. That’s because while experts often make predictions about future market activity based on past performance, no one actually knows what will happen. Instead, experts usually recommend investing for the long term and letting market fluctuations ultimately recover any losses.
But keeping your money under the mattress probably won’t cut it, no matter what happens to the market. Here are some of your options for handling your money in a volatile market, along with the worst case and best case scenario for each.
If you invest in index funds
If you don’t need cash soon, you should still invest in the stock market, Sean Gould, certified financial planner (CFP) and wealth strategist with Waddell & Associates, told Business Insider. Index funds, mutual funds whose holdings track a particular index like the S&P 500, are a straightforward way to do it.
“If you have extra cash that’s not earmarked for a specific short-term goal (i.e. upcoming home repair or a child’s wedding), then investing in the stock market after a correction is not a bad answer,” Gould said. “It’s almost impossible to perfectly time a stock market bottom, so investing after a market correction can be a good entry point for long-term investors.”
The best-case scenario: “For long-term cash that’s invested right now, the best case would be the recent correction was temporary and the markets rally, therefore you purchased stocks on sale,” Gould said.
The worst-case scenario: If the market remains unchanged or down for the year, holding index funds won’t offer gains and your portfolio will remain stagnant, Ken Mahoney, registered investment adviser and CEO of Mahoney Asset Management, told Business Insider. But while a portfolio with little growth isn’t ideal, it’s not the worst-case scenario.
The worst situation would be if the economy entered a recession and the market immediately fell for an extended period, losing money in the short term.
If your money is in the market, “think about hard stops that you are unwilling to see your portfolio go below, as a substantial loss can and usually does take multiple years to fully recover from,” Rebecca Walser, wealth strategist and CFP, told Business Insider.
If you invest in individual company stocks
Experts typically advise against the average investor choosing to buy stock in individual companies, as opposed to through index or mutual funds. Even pros like Warren Buffett and John Bogle recommend index funds, which are diversified by design, for individual investors.
However, if you do own individual stocks, you still need to make diversification a priority, Gould said.
“Investing in individual company stocks is fine as long as you’re owning numerous companies across different industries and geography,” he said. “Concentration risk can be detrimental to a portfolio.” He said investors shouldn’t have more than 5% to 10% of their portfolio in any one company – with their fate tied to that of specific companies, they can still lose money, but this strategy will reduce overall portfolio risk.
The best-case scenario: Mahoney said that several economic issues – like a reversal of the partial government shutdown, a China trade war truce, and more Brexit stability – need to be resolved in the short term for a best-case scenario.
In this scenario, “companies’ earnings beat analysts’ estimates, as we have seen with a few of the big banks. These events drive confidence into the market, increasing demand and hopefully continue to push these early year gains higher and higher,” he said.
The worst-case scenario: Again, the worst case scenario is losing a significant amount of portfolio value. If you’re heavily invested in stocks from individual companies, the value of your portfolio will fluctuate with those companies rather than with the market as whole. That’s not to say that stock-picking removes you from the volatility of the larger market – even a selection of diversified stocks can suffer big losses if the whole market takes a tumble, Mahoney said.
If you keep your money in a high-interest savings account or CD
If you need your money in the next year or two, Gould suggests investing the cash in a high-yield savings account or certificate of deposit (CD). Both of those products can pay up to 3% interest.
The best-case scenario: Your money will keep growing steadily despite market fluctuations, although the growth will be slow.
The worst-case scenario: You miss out on potential growth. “The markets rally while you’re sitting in cash,” Gould said, “but it was still the responsible investment.”
If you keep your money in a checking account
A traditional checking account offers a lower savings rate (usually nothing at all, or a fraction of a per cent) than a high-interest savings account or CD but offers easy access to your money. It’s the digital equivalent of keeping it under your pillow. Traditionally, experts advise against keeping your savings in a checking account because of the missed opportunity for potential growth found in riskier investments.
The best-case scenario: “You’ll have liquid cash and experience no loss if the market experiences a significant downturn,” Walser said.
The worst-case scenario: “The last two months were just a hiccup, President Trump gets a great deal with China, the market rejoices and goes through the roof, and you prematurely took your cash out and missed the upside,” Walser said.
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