This post contains my opinions and are not meant to serve as professional investment advice.
In times of stress and uncertainty, many people make financial mistakes. It’s easy to do, and it’s very common. We’re seeing this again now, thanks to COVID-related economic uncertainty.
Mistakes vary from person to person, because each person reacts differently to stress.
Some people become like a sieve, spending money like it’s water running through the holes. For example, they might do either of the following:
- Start stocking up on food or supplies because they’re worried their family won’t have enough.
- Use “retail therapy” as a form of comfort to distract themselves from tough times.
Other people become like squirrels—hiding away their money. They might do this because of worries about job security or because an extra-large rainy day fund makes them feel in control.
At this point, you might be thinking, Is being a squirrel really a problem? Well, in fact it can be! If squirreling away your money means you become too thrifty, that’s a problem. (To continue the squirrel analogy, it’s like when the squirrel can’t find the acorns they buried before winter.)
What does too thrifty look like? Here are some examples:
- Forgoing items you and your family actually need, or refusing to buy things you want and can reasonably afford “just in case.”
- Pulling your money from the stock market to keep it in cash in your bank account (or under your mattress, etc.).
As the stock market fluctuates, I’m seeing a lot of sieves and squirrels out there—and that’s what I want to talk about today.
The stock market dipping because of the coronavirus has understandably caused a lot of anxiety. It’s caused a lot of people to lose confidence in their finances, and many of those people are thinking about making drastic changes to their investments.
Whether you recognize yourself as a financial “sieve” or a “squirrel,” this is a must-read for you. Here are 5 reasons why you shouldn’t pull your money out of the stock market to spend or save it right now.
Why You Should Keep Your Money in the Stock Market
As the stock market bounces around, it’s easy to worry. However, making financial and investment decisions from a place of worry is a bad idea. Mistakes made now can have implications for years or even decades!
They key to good decision-making is remaining calm and level-headed—keeping your emotions in check.
That said, here are the reasons you should keep your money in the stock market—and why you shouldn’t be as worried as you might think.
- The economy will recover. Yes, unemployment will be high for some time, companies’ profits will take a hit, and some companies (especially in the retail sector) may become bankrupt or at the very least have to restructure. But the good news is that the U.S. is still a strong nation with hardworking people and reputable companies. We will bounce back. This is always hard to remember when you’re in the thick of it, but it’s always been true. Remember the Great Depression? The Great Recession? History shows that tough times don’t last forever.
- Most companies are still strong. Are many sectors impacted by this pandemic? Yes, but the majority of U.S. companies will be able to survive this situation. Unfortunately, business leaders will have to make difficult decisions to furlough employees, close stores, etc., which will affect many Americans; however, these decisions will likely allow many companies to survive long-term—allowing them to hire their workers back and regain profits in the future. What’s more, some companies are actually thriving right now. Industries like the food sector, health care, and others are seeing greater need than ever.
- Some stock prices have fallen. Many stocks have been hit hard by this pandemic, which means their prices are low. That might make you worried, sure, but remember the first rule of investing: buy low and sell high. That means right now is not the ideal time to sell! When you sell investments at a lower price than you bought them, you lose money. (Right now, you have only “theoretically” lost money from fallen stock prices. But if you sell lower than you bought, you lock in that loss.)
- Your investment timeline is long-term. When you decide to invest in the stock market, it should always be with a mindset of investing for the long term. (That means five years or longer.) That’s because every market cycle includes peaks and valleys, dips and rebounds. When you keep your money in the market over the long haul, your portfolio has enough time to recover from any dips (unless you are in retirement or near retirement). Plus, assuming your portfolio is diversified (meaning you don’t invest too much in any one stock or sector, etc.) you should be fine!
- Note: if your timeline is shorter, you should stick to more liquid investments like savings accounts, CDs (Certificate of Deposit), etc.
- You will incur capital gains taxes. Anytime you sell a stock at profit, you will incur capital gains taxes. If you haven’t held the stock for at least a year, you will incur short-term capital gains taxes, which can be significantly higher than long-term capital gains taxes. Why incur this unnecessary expense?
When You Should Take Your Money out of the Stock Market
As you’ve learned, in most cases it’s unwise to take your money out of the stock market.
However, there is one exception to the keep-your-money-in-the-stock-market rule. That is a true emergency. What does an emergency look like? Basically, it’s when you have no other way to raise money other than selling off a portion of your investments.
An financial emergency might look something like the following:
- You have to pay your bills.
- You or your family has an expensive medical (or other type of) emergency.
When an emergency happens, you just might have to sell a portion of your investments in order to pay expenses—and that’s okay. Emergencies happen to the best of us, and you can mitigate your losses by just continuing to make good financial choices in the long term.
How to Keep Your Finances in Order (and Stay Sane Doing It)
When it comes to the stock market, there is little that you can do personally, right now, to affect the outcome. As mentioned above, investing is a long game. (That’s part of the reason it can cause so much anxiety.)
If having no control over the stock market is making you feel, well, out of control, my advice is to stop watching the daily stock market updates. Take a step back from monitoring the daily fluctuations, which are normal.
Instead, focus on the things you can control, today.
When it comes to finances, this means your day-to-day finances: your budget and spending. By keeping your money in the stock market (barring an emergency) and sticking to a manageable budget, you can make a big, positive impact on your finances right now.
Here are a few free printable budgeting worksheets to help you.
Also, you can (and should) focus on fun things you like doing! This will keep your mind off your financial worries and help prevent you from making drastic, unwise, spur-of-the-moment financial decisions. Consider doing things like:
- Spend time with your family
- Peruse Pinterest for new recipes or crafts to try
- Learn a new skill (how about drawing or singing?)
- Go for a walk, garden, or do some other physical activity
- Work on projects around the house you’ve long been wanting to complete
- Develop a skill you’ve already started
In fact, during this quarantine my son has spent time learning how to draw bubble letters. He started with the uppercase bubble letters and is now working on lowercase bubble letters. (It might sound silly, but it’s so much fun!) He’s also learned how to ride his two-wheel bike, so we can all ride together as a family this summer.
I hope these tips help you navigate these uncertain times with your finances intact.