COVID-19 has brought about many changes, including fluctuations and volatility of the market leaving many people uncertain about their next move, especially with their investments. You might be asking yourself:
Will I be okay? How are my investments really impacted?
Let’s talk about a few resources you can leverage to make intentional decisions about your investments when the market (and the world at large) feels unpredictable.
Defining the Market
Sometimes the world of finance can seem really unapproachable. That misconception stems from wading through the jargon used to define different processes and systems. Today, we’ll break down what some of these common terms mean to help you get a better grasp of the lingo, and empower you to make informed decisions.
What do you think of when you hear the phrase “the market”? Sometimes it can feel like the market is just a vortex of money bouncing up and down without rhyme or reason. But the market is, of course, much more complex than that.
Markets, in general, are places where two or more parties can come together to exchange goods or services. There are many different types of markets but the one most applicable to this question is the financial market, which is a place where any security is traded.
The financial market consists of varying parts – like the stock market, exchanges, bond market, and foreign exchange markets. However, when you hear the phrase “the market” in the media, most of those sources are often referring solely to the U.S stock market.
How are markets measured? In other words, what system is used to gauge the total market performance? The short answer is an index.
An index measures the performance of a basket of securities (stocks, bonds, etc.) that is intended to represent a certain area of the market. You’re probably familiar with a couple of big indexes like the Standard & Poor’s 500 (S&P 500) and the Dow Jones Industrial Average (DJIA). While there are other indexes, let’s take a closer look at these two to compare how they operate.
How The DJIA Works
The Dow Jones Industrial Average was the first stock index to track American markets. Today, it tracks 30 blue-chip stocks ranging from all the major sectors (IT, finance, petroleum, chemical, pharmaceuticals, etc.) except utilities and transportation which have their own separate index.
Since the DJIA is a price-weighted index, the price of the stock is the primary determinant of the overall performance. A price-weighted index takes the price of all the stocks in the index and divides it by the total number of companies in order to ascertain the index’s value. This means that a higher-priced stock will get more weight than a lower-priced stock, making the change in stock prices a key factor in it’s performance metrics.
How The S&P 500 Works
The S&P 500 tracks 500 stocks across all economic sectors and in order for a company to be selected by the committee, it has to meet the following criteria:
- The company has to be in the U.S
- Reach a market cap of at least 8.2 billion
- 50% of the stock must be available to the public
- Four consecutive quarters of positive earnings
- Good liquidity
Unlike the DJIA whose performance is predominantly measured by stock prices, the S&P 500 tracks the market capitalization of the companies in the index. This just means that the index tracks the total value of a company measured by the stock price and the number of shares.
Why the S&P 500 is More Reliable
Since indexes are representations of the market as a whole, it’s important that the representation itself paints as accurate a picture as possible.
Let’s put this in terms of a poll. Polls are used to determine how a candidate is performing. Each method is designed to ascertain a candidate’s ranking among their competitors. The methods that are more comprehensive are often the better indicator of how the candidate is doing.
The S&P 500 tracks a more comprehensive part of the market not only by tracking more companies but also by tracking the total value of each company as opposed to just the stock prices, making it a more reliable system.
What “The Market” Means for You Now
With so many market fluctuations happening in response to uncertainty surrounding COVID-19, many people are concerned about the state of their investments. We know that the stock market is volatile and will experience dips and drops from time to time. However, this season has brought more than a few ups and downs, leaving investors concerned.
We want to help shift your focus from the things you can’t control to the things you can control. Here are a few action items to get your investments and financial plan back on track.
Give Yourself a Break
With our 24/7 news cycle, new information is at our fingertips every time we refresh our browsers. Sometimes that is a good thing, but other times it can just be overwhelming. Give yourself the grace to take a break and take care of your mental and physical wellbeing.
Take Another Look at Your Plan
When you’re stressed, separating reality from the story you’re telling yourself can be tough. Looking at your investment plan will help you get a sense of where you really are and can help eliminate fear or anticipation.
Remind yourself of your short-term and long-term investment goals as these are the benchmarks for your investment strategy and what type of securities (stocks, bonds, etc.) you buy. How have your goals changed due to these market changes? Odds are many of your long-term goals will stay the same. If this is the case, it is often best to stick with the plan you have.
This is also a good moment to look at your risk tolerance and see how your investments are allocated to best reflect that. Perhaps some minor changes need to make you more comfortable moving forward or maybe it’s best to keep it the same. No matter what, gathering all of the facts is so important before you make any decisions.
Keep Investing If You Can
It may seem counterintuitive to continue with your investments during these hard times, but it can actually help you a lot in the long run. Keep contributing to your retirement accounts (401k, 403b, IRAs) as it will give you access to tax benefits while also bolstering your savings, especially if you have an employer match. Investing, even if it is smaller amounts, can help you stay on track to reach your goals and give you the momentum you need to keep saving.
Understand Your Cash Needs
A strong cash reserve is on the minds of many due to a significant drop or loss of income for business owners and individuals alike. Start with making a 6-month plan of all your expenses: bills, food, rent/mortgage, etc. Then, take a look at the cash you have available to use.
- Can you draw from an emergency fund or savings account?
- Have you used the CARES Act stimulus check?
- If you are a business owner, have you applied for CARES Act relief provisions like the paycheck protection program?
- Can you take out a small loan or a limited line of credit?
There are many different things you can do to help cover your expenses during this tough time. Your financial advisor should be able to help recommend avenues that make the most sense for you and your unique situation.
Work With an Advisor You Trust
Trusted advisors are beneficial in times of hardship. When you are working with someone you trust, you will be able to have more confidence in your plan moving forward. We are here to help you create an investment plan aimed at reaching your goals. Get in touch today.