Has the current market volatility made you wonder if now is a good time to invest? You may have heard the phrase “the time to buy is when there’s blood in the streets,” and feel motivated to invest in the hopes of capitalizing on low prices in the market. This type of investing strategy, where you place trades that are opposite the majority, is often called contrarian investing.
As we have been hearing this common question over the last few weeks, we wanted to share some guidance to those who are thinking like contrarian investors. Our Financial Planners have talked with clients around the country who are going through the current Coronavirus pandemic, so we thought it would be beneficial to share our perspective on the current climate with our readers.
We've been pleased that many folks understand that volatile times are not the right time to make knee-jerk reactions regarding investment portfolios.
On the other hand, we've been asked quite frequently if now is the right time to invest. Certainly opportunistic investing can be a beautiful thing, but it's not without its risks. While I have often shared the sentiment that opportunistic investing is a great thing, having cash in the midst of a crisis can be an even more valuable thing.
If you've been wondering this question and trying to decide if now's the right time to add money to your existing portfolio or perhaps a new investment opportunity, there are a number of considerations you should keep in mind.
The first question you should ask yourself when deciding to invest is, “what is your end goal?” Are you investing to fund your retirement, your child’s college tuition, or that rental property you’ve been eyeing?
This question will play into three considerations we will break down to help you determine your strategy. As with any important decision, there are opportunity costs when it comes to investing.
The first consideration may not be surprising. Would investing now and using your available cash that is currently in your savings account or emergency fund align with your goals? It's important to remember when you invest, you are parting with your money because it is not liquid or easily accessible. That's a long-term proposition. It's not speculation and it's not trading.
We can have a high degree of confidence in the markets when it comes to long-term returns and performance, but in the short-term nobody knows what is going to happen in the stock market. Remember, we're still in the midst of a pandemic. There's a lot of uncertainty going around and on top of that, we're in the middle of an election year, which will likely be contentious as they have historically been.
Is now the right time to part with some of the safety and stability that having cash in hand offers? While we know that the long-term returns of money market funds or CDs are not really that impressive, those two options offer a benefit that is especially apparent during times of crisis. They offer low risk. The role risk and liquidity play in your financial plan is that the money is available when you need it.
It’s prudent to think very carefully to decide whether now is the time to reduce the amount of liquidity and stable money that you have access to. This money decision should be based on the current state of your finances, and it's okay if now might not to be the time to decrease your liquid money.
The third consideration is based on the numbers. What is your cash flow situation? How are your paychecks looking? Are you an employee of a hospital or practice? Do you own and operate your own practice? Many private practices have lost revenue due to temporarily shutting down and even large hospitals could be negatively affected. If your income or financial situation has changed, due to the pandemic, just know you are not alone.
We don’t know how long the pandemic will impact the economy, stock market, or healthcare industry. Experiencing the pandemic in a way that threatens your near-term income can bring you stress and could affect your financial plan. You may be expecting a reduction in salary, compensation, or distribution over the next couple of months. If your income is going to shift, you should factor this change into your decision to invest. Needing to find other ways to cover your living expenses may help you come to the conclusion that its not prudent to give up the stability of cash for the potential long term-payoff that investments may provide
If you have concluded that you have money available and it is appropriate to invest this sum of money for the long-term, think about these two tips:
Think about your current strategy and ask yourself the following questions: Is your current investment portfolio allocated in the right way to benefit from long-term market movements? Would that be an appropriate place to add money or should you consider a new investment vehicle or new strategy to invest?
Is it appropriate to invest all the cash you've identified at once? Would it be more sensible and in line with your comfort level to dollar cost average? To add a refresher on this term, dollar cost averaging is a way to invest the amount you've identified in smaller increments over time.
For example, instead of putting $100,000 all to work right now. You could choose to invest it $20,000 a month over the next five months to hedge against any continued volatility through the balance of this year.
So far, I’ve shared considerations and tips that have hopefully helped you through your decision process.
Now that you have thought through those factors, let’s dive into the criteria you should meet in order to invest.
Before you begin investing, make sure you are prepared and have all of the following:(1) Employment or Income Security
There is a big difference between speculating and investing. Speculation is going to Vegas and maybe you get lucky. Taking a bet on the stock market is a risky move, especially when there is economic turmoil and no strategy in place.
Contrarian simply means aiming to do the opposite of the crowd. Obviously buying shares in a company at a deep discount can offer benefits. But, as with any investment opportunity, there are risks. The due diligence of an investor is crucial for success. Today, there are increasingly more investment choices available, more information you can find online that can be wrongly written or interpreted, and more access to investment opportunities. Consumers can buy stocks from the touch of a finger on applications like Stash or Robinhood. A financial planner can give an investor the proper guidance to sift through and understand the abundant investment opportunities.
To flourish, long-term investing takes diligent planning and research. With limited time and knowledge of how investments work, a financial planner can take the burden of research off you. They are trained in investing and start by looking at your overall financial picture, then give you scenarios to help you confidently decide the best course of action. A good financial planner won’t simply tell you should or should not invest. They will listen and analyze your financial history, then guide you through making investment strategies to help you and your family prosper.
Our clients often say they wish they would have started their financial plan sooner. So, what are you waiting for? We offer a complimentary discovery call to any doctor who has financial questions.
For over 50 years, Spaugh Dameron Tenny has provided comprehensive financial planning for physicians and dentists across the U.S. In addition to providing personalized advice, we walk our clients through their options to help maximize finances and maintain financial security.
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