NerdWallet's Smart Money Podcast - Coronavirus Special Edition, Part III: Coronavirus and Your Portfolio

Episode Date: April 2, 2020

Nauseating drops in the stock market can be hard to endure, but most of us should try to do just that -- and even invest more, if we can. If you need the money within five years or you’re losing sleep, though, you might need to get at least some of your portfolio to safer ground. As always, send us your money questions! Email [e-mail] or call or text the NerdHotline at 901-730-6373.

Welcome to the NerdWallet Smart Money Podcast, where we answer your money questions in 15 minutes or less. I'm your host, Liz Weston. And I'm Sean Piles. As always, be sure to send us your money questions, call or text us at 901-730-6373. That's 901-730-NERD. Or email us at podcast at nerdwallet.com. We've been talking in the last few episodes about how the coronavirus pandemic is affecting the economy and your finances and what you need to know now. In this episode, we'll focus on investing and your portfolio with the help of investing nerd Ariel O'Shea.

Hey, Ariel. Thank you for joining us. I want to start off by asking you, what is the most important thing for people to know about their investments right now? So the stock market is what's really inciting a lot of fear right now. It's up, it's down, it's up, and then 10 minutes later, it's down. And it's really scary for a lot of people. So the first thing to know is that if you're investing for a goal that's less than five years away, so you have a down payment for your house that you want to buy in a few years,

or you're saving for a big vacation, that money should not be in the stock market anyway. You really only want to invest in the stock market for goals that are at least five years away. So that makes you a long-term investor. And if you are a long-term investor, then the best reaction to these market moves is really no reaction at all. It's really best to ride it out. So if you don't sell, you haven't lost any money.

Even if you log in and you look at your 401k and it's really terrifying, you just need to keep in mind that if you ride it out, it will come back. And long-term investors have that time on their side for your portfolio to recover. So this is really an opportunity. And a lot of people say that the stock market is the only market where when things go on sale, people kind of flee the store. And it's really important not to flee the store right now. So if you're making regular investment contributions for your 401k or other investment accounts, keep in mind that you are getting more for your money right now. And so that is a good thing. But if you're scared and it's totally reasonable to be scared, it's really important to remind yourself of your goal and your time horizon that can help calm you down a little bit. So if those two things haven't changed, your goal is the same, your time horizon

is the same, then your investment strategy really shouldn't change either. But the flip side of that is that this is a very stressful time. And so you really don't want to risk your mental health. And if the stock market is adding additional stress on top of everything else that's going on, and you feel like you really can't deal, you know, you're not sleeping, you've already sold, you can't stop checking those account balances, then that's a really good sign that you're probably taking more risk than you can handle. And so it's better to take less risk and be able to stick with your portfolio than take too much and be panic selling every time the market, you know, makes a turn for the worst. So that's a good signal to dial it back. And what about folks who are closer to retirement? I know

a lot of people are probably concerned that they won't ever be able to retire because of recent drops in the market. So if you're near retirement, it's a little bit of a different story, but not totally. So you still need to remember that you have a long time horizon. So you don't stop investing on the day that you retire. You still need your money to last 20, 30, maybe even more years. And that means you need to keep it invested. And so you should still be thinking with those years in mind. But a lot of financial planners recommend having a pot of safe money. And so what that means is that you have cash available in savings or safer investments

that you can cover for at least the first few years of retirement so that you're not having to sell investments to fund your expenses. You're sort of building in that time horizon where you're not going to need to sell stocks when they're down because you have that cash available to fund your lifestyle during the beginning of retirement. If you're near retirement and you haven't rebalanced or re-evaluated how much risk you're taking, it's really important to do that. It's not a great time to rebalance right now, but you should definitely be taking less risk as you approach retirement. And so take a look at that and make sure that you're allocated the right way for when you're retiring and how much risk tolerance you're willing to take.

And then I think at times like this, you get itchy fingers, right? You like want to do something and it's really important to control what you can control. So a lot of times that means saving more money if you can. You can look and see if you can lock in higher interest rates with CDs before they fall further. You could shop around and see if you can find a higher yield savings account. You can increase your 401k contribution. If you're going to be in there peaking at the balance anyway, bump it up a percent. That might make you feel a little better.

Max out an IRA. Consider investing more in 529s if you have kids for college. I did that the other day. Made me feel pretty good. And so those are all things that make you feel like you're doing something and they're all positive actions that are good reactions to stock market volatility. And then if you find yourself in need of cash, it's really important to know where you should get that money. So Sarah and Kim both talked about emergency funds and the importance of having that. But if you don't have that or

you find yourself running through it, then you should look at other cash savings, taxable investment accounts, because you can pull up money out of those without penalties. And then retirement accounts are really last on the list. You want to preserve that money for retirement, and there are often penalties and taxes for pulling your money out. But a Roth IRA is sort of what we call like the best last resort, because you don't get taxed or penalized for pulling your contributions out. So that's money that you've put into the account, not your investment earnings, those fall under different rules, but you can pull your contributions back out at any time. So if you need to do that, and

I would stress like, again, best last resort, then that's the best retirement account to tap if you have one. So getting back to the idea that stocks are on sale, is now a good time to invest more? I would argue that it's always a good time to invest more as long as you have sort of the basics covered, right? So that emergency fund that we talked about, you are investing for the five-year or more timeline that we talked about. If all of those things are true, and you know, you don't have high interest rate debt, then yes, I think now is a good time, then, you know, good time to invest more money for sure. But don't try to time the market. Never a good idea. Okay, but what if I want to try my hand at stock picking? Should I do that or just stick with index funds?

So our house view is that your entire portfolio should probably be invested in low cost index funds and in ETFs. If you want to dabble in individual stocks, you think something is really hot right now, or you just want to sort of, you know, learn how to trade individual stocks, then we recommend keeping those to 10% of your portfolio or less. But generally speaking, most people should be invested in low cost index funds. They're easy to diversify. They are cheap, like I said, and they are the best way to build a portfolio, especially a long term portfolio. Okay, what about those people who have those itchy fingers you were talking about and want to get started investing one way or another?

Do you have any recommendations for where they should start? You know, we don't really give specific recommendations on specific funds or stocks, but we do have some lists on our site about best performing index funds and best performing stocks. So we have a best index funds page that people can check out. We have a best performing stocks page that people can check out. And then we have a high dividend stocks, which is basically just a list of stocks with not the highest dividends, but basically the sort of the safest and highest dividends. So not like we take out the really risky ones. What about changing our asset allocation? The market is changing all the time. And maybe I should be getting out of international stocks or small company stocks and moving to the safety of large company stocks. What do you think about that? You know, I don't think that you should be changing your strategy based on what the market

is doing at any given moment. If you set that goal for reasons that you decided at that time, then you should probably stick to it. On the other hand, if you're having trouble figuring out if your asset allocation is right for you, or if you have the appropriate level of diversification, there are resources that can help you. You know, at NerdWallet, we talk a lot about robo-advisors, and they do a lot of that work for you if you're interested. There are a lot of asset allocation calculators online. We have one, too, that doesn't get super into specifics like you're looking for, but it

will tell you sort of the breakdown of how you should be investing. And then I always tell people to look at target date funds. A target date fund is basically a mutual fund that invests according to your age. So you pick a target date fund with like the year that you plan to retire in the name. So it would be like target date fund 2050. And it will change the amount of risk it's taking as you approach that retirement age. So if you pull up a target date fund that aligns with the year that you plan to retire, you can sort of see how that fund is invested. And you can mimic that in your own portfolio, or at least use it to guide you.

But if you're looking to sort of manage things yourself, or you want to be more hands on, I think that's a really good way to learn about how, you know, the professionals are investing for your timeline. All right, Arielielle, thank you so much for sharing your insights with us. And now let's get to our takeaway tips. First up, write it out. If your goal is more than five years in the future, your investments will recover. But make sure you can sleep at night. Taking less risk is better than panicking and bailing on your plan. And lastly, control what you can control. Look for a better rate on your savings or bump up your 401k contributions to take advantage of stocks on sale. And that is all we have for this episode. Do you have a money question of your own?

Turn to the nerds and call us or text us your questions at 901-730-6373. That's 901-730-NERD. You can also email them to podcast at nerdwallet.com. You can even email us your voice memos if that works for you. Also visit nerdwallet.com slash podcast for more info on this episode. And remember to subscribe, rate and review us wherever you're getting this podcast. And here's our brief disclaimer thoughtfully crafted by NerdWallet's legal team. Your questions are answered by knowledgeable and talented finance writers, but we are not financial or investment advisors. This nerdy info is provided for general education and entertainment purposes and may not apply

to your specific circumstances. And with that said, until next time, turn to the nerds.