Although financial experts in the U.S. are predicting that the stock market is in for a roller coaster year of potentially dramatic ups and downs, they estimate that the S&P 500 will only sustain modest losses, about 3.6% for the year. The downturn will extend beyond the U.S., with those in the financial industry predicting the MSCI World Index, an equity benchmark that tracks global firms, will post a loss of 6.1%.
That's according to a survey of 2,700 financial professionals worldwide, including 300 U.S. wealth managers, investment advisors and brokers, that Natixis Investment Managers carried out between March 16 and April 24, 2020.
For investors, especially younger ones who may not have personally experienced the markets notching an annual loss, that means they'll need to potentially pay more attention to their investments, especially if they're aimed at short-term goals.
"The global pandemic that we are currently facing is absolutely terrible and we should not lose sight of that. However, that should not cloud your judgment when it comes to investing," says Mackenzie Richards, a certified financial planner (CFP) with Rhode Island-based SK Wealth Management. "Do not panic and do not be scared."
This is the time to take a step back and determine what your investment is earmarked for and then decide if it is invested appropriately, says Ohio-based CFP Monica Dwyer.
If you're investing for a short-term goal, such as buying a home in the next two years or creating an emergency savings cushion, then a market downturn, even a modest one, could impact your ability to achieve your goal because you may have to sell at a loss. In general, stocks tend to be more risky than other investments like bonds or than simply leaving your savings in cash.
"Short-term investors should tread lightly," says Howard Pressman, a financial planner with Virginia-based Egan Berger & Weiner. "If your time horizon to use all or most of your money is one to five years, you probably shouldn't be investing in stocks."
Instead, consider putting that money in a high-yield savings account, even though the interest is not as high these days as a year ago. Still, online savings accounts such as American Express, Marcus by Goldman Sachs and Vio Bank offer greater interest than brick-and-mortar banks, and the money is FDIC-insured.
"Some money should not be invested, but rather remain in a safe place, like emergency funds or anything that you need to spend or use in the next two to three years," Dwyer says.
However, most young investors are investing for the long-term, or retirement. "If that is the case, then they should be delighted that the market is down now because that means that they are buying the market on sale," Dwyer says.
If you already have three to six months of living expenses savings set aside in an emergency fund, consider putting more money into a retirement savings account, such as a 401(k) or individual retirement account, while the market is down, even if it's just another 1% to 2% per paycheck. "A small percentage for a young person goes a long way," Dwyer says. The longer you invest, the more compound interest will grow your money because the returns continue to build on themselves.
It's more important to focus on the amount you are saving than on short-term returns, says Mark Beaver, a CFP with Ohio-based Keeler & Nadler Family Wealth. "If you invest $100, you can try to turn it to $200 through risky investments, or you can just invest another $100," Beaver says. "Your actual savings make more of the difference in accumulating wealth early on. Later the returns become more significant."
While no one can predict the future of the markets, stocks have historically been a long-term investment that pays off: The average annual return for the S&P 500 over the past 90 years is around 10%.
The markets ebb and flow, so although there have been multiple down years, they tend to bounce back, says Leon LaBrecque, a Michigan-based CFP at Sequoia Financial Group.
"Just because the market is down doesn't mean that you shouldn't invest," says Karen Van Voorhis, director of financial planning at Massachusetts-based Daniel J. Galli & Associates. "A younger generation has lots of time to ride out a market downturn."