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Money moves for uncertain times
After the longest bull market in history, it’s understandable if recent volatility has left you feeling a bit of financial whiplash. Even if you’ve been responsible with your money, the current economic climate can make it seem like your future is out of your hands.
The bad news: you can’t control the economy. The good news: you can take steps to reinforce your financial foundation when faced with shifting markets.
Step 1: Allocate
If you have a strong financial footing right now, take the opportunity to put available funds in the right places for you. The goal is to strike a balance between liquidity (how quickly you can access your cash), safety of principal (the return of your money), and yield (the return on your money). A financial advisor can help you figure out what that balance might look like for your situation.
You can start by shoring up your emergency fund. This may seem like a no-brainer, but it’s easy to get a little lax about saving when times are good. Focus on accumulating a minimum of three to six months of living expenses in a savings account that you can tap if you lose your job or have to take a pay cut.
It’s also a good time to consider dealing with any high-interest debt you may be carrying, like credit card bills. By paying down your most aggressive debts, you can save on interest payments today while potentially avoiding ballooning bills in the future if money gets tight and you can only afford minimum payments.
While you’re whipping your debt into shape, take additional steps to help boost your credit score, like setting up auto payments. A higher credit score can help you take advantage of lower rates for loans, refinancing, and lines of credit at a time when lending can be competitive.
If you have people in your life who count on your income, it’s a good time to consider different types of insurance coverage. It’s always smart to lock in good rates while you’re in good health. If you have disability or life insurance coverage through your employer, make sure it’s enough and supplement if you need to. And if losing your job would also mean losing coverage, think about your Plan B—this goes for health insurance too.
Step 2: Assess
Think of these uncertain times as a chance to hit the reset button. Evaluate your financial picture and find opportunities to make tweaks and tidy up.
Start with a spending check. Take a look at your expenses through fresh eyes. Do you have a budget? Is it up to date? Are you sticking to it and living within your means? A simple assessment of money coming in and money going out can help you prepare for a sudden shift in cash flow.
Then, look for ways to trim expenses and curb mindless spending. Maybe time at home has revealed just how much you’ve been spending on dining out or ride sharing services. Could you cut back on online shopping? And are all those streaming services really necessary?
Once you’ve identified ways to tighten up your spending habits, take it one step further. Establish a crisis budget by considering how much you’d spend each month if you cut out all expenses beyond the bare essentials like groceries, housing, utilities and transportation. This could help you quickly shift your spending in a worst-case scenario and could potentially help you stretch that emergency fund even further.
If your portfolio has you feeling panicky, reconsider your risk tolerance. This doesn’t mean selling off investments or moving around lots of money. But it is an opportunity to reassess your financial priorities and identify opportunities to diversify1 and rebalance by reallocating your contributions. If this feels daunting, talking to a financial advisor can help.
Step 3: Anticipate Recovery
Remember that recessions generally don’t last forever so keep your long-term goals in focus.
Even though markets may be down today, history has proven they will bounce back over time. Try to be patient, don’t panic, and stick with your plan. Even if you’re nearing retirement, keep in mind that you won’t need to access your full retirement fund right away.
In fact, it's often a good idea to keep making your typical investment and retirement contributions even when the markets are in decline. Consistent contributions result in dollar cost averaging2, which means you could benefit from lower-cost investments over time.
Don't try to time the market by selling when it's up and buying when it dips again. Identifying the perfect moment to buy or sell is notoriously difficult to get right, even for the experts. If it helps you stay sane, avoid checking your investment accounts in times of volatility.
Uncertainty is always uncomfortable, but try to keep in mind that this too shall pass. Even if a recession is unavoidable, the average economic downturn lasts about 1.5 years3 and the market has a long history of recovering.
1 Diversification does not guarantee a profit or eliminate the risk of a loss. 2 Regular investing [dollar cost averaging] does not assure a profit or protect against loss in a declining market. You should consider your ability to continue investing during periods of low prices. 3 National Bureau of Economic Research: “US Business Cycle Expansions and Contractions”, data from 1854-2009 https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions
This material is for informational purposes only and is not intended to be, nor shall it be interpreted or construed as, a recommendation or providing any time of financial or investment advice, impartial or otherwise. You should always contact your financial professional to determine what is best for your own financial situation.
Financial planning and investment advice provided by John Hancock Personal Financial Services, LLC (“JHPFS”), an SEC registered investment adviser. Investments: not FDIC insured – No Bank Guarantee – May Lose Value. Investing involves risk, including loss of principal, and past performance does not guarantee future results. Diversified portfolios and asset allocation do not guarantee profit or protect against loss. Nothing on this site should be construed to be an offer, solicitation of an offer, or recommendation to buy or sell any security. Before investing, consider your investment objectives and JHPFS’s fees. JHPFS does not provide legal or tax advice and investors should consult with their personal legal and tax advisors prior to purchasing a financial plan or making any investment.”