COVID-19 flipped the market on its head, but your financial goals don’t have to be

If there was one word to describe the relationship between 2020 and the stock market, it would be unpredictable. On Feb. 19, the S&P 500 hit an all-time high, and one week later we saw it drop 13 percent. In the period from Feb. 24 to March 24, there were 22 trading days with the market moving up or down more than 2.5 percent for 18 of those days. This was more than any other time in history with the same number of trading days. Today, stocks are up nearly 40 percent from their record lows in March, marking what could be the shortest bear market ever. 

While the uncertainty of the stock market can be unnerving, it is crucial to remember the market is a forward-looking mechanism, so even in worst-case scenarios, there are likely brighter days ahead. Sit down, breathe and do your best not to overreact to short-term market changes. Take these uncertain times to go back to the drawing board and reflect on your long-term financial goals such as buying a home, sending your children to college and retirement. 

Although it is important not to overreact, turbulent markets can serve as excellent reminders to remember and review your long-term financial plans. If you’re aiming to buy your family a home or send your children to their dream school and be prepared for retirement, it is important to have a diversified portfolio that allows you to do so. 

Diversifying Assets

Investopedia defines diversification as a technique that reduces risk by allocating investments among various financial instruments, industries and other categories. When markets are high, investors are prone to boundless optimism, and they often pour all of their money into stocks that will likely see steady increases.

The U.S. has bared witness to dozens of companies who have been affected by COVID-19 immensely, specifically in the cruise, airline and hospitality industries. Due to such drastic changes in certain industries, it may not be the best idea to purchase all of your stocks and place assets under one umbrella. 

Having a combination of asset classes will reduce your portfolio’s sensitivity to swings in the market. Bond and equity markets often move in opposite directions, so if your portfolio is diversified across both areas, shaky movements in one will be offset by positive results in another. 

When diversifying your portfolio, remember to remove your bias toward domestic securities, and invest in international stocks as well. Oftentimes, investors are able to benefit from growth overseas while the U.S. market stagnates. It is highly likely that international stocks and bonds will continue playing a critical role in investments as companies grow to maturity around the world. 

Structural Changes In The Market

During COVID-19, the market has seen dozens of structural changes that have increased stocks prices, especially within the big tech sector. Microsoft CEO Satya Nadella summed up how the virus has affected Silicon Valley perfectly, “We’ve seen two years’ worth of digital transformation in two months.”

Though stock prices in the tech sector seem to be steadily rising, it is important to evaluate how technological changes may impact holdings to understand which asset types, securities or sectors face a higher risk of obsolescence from disruptive technologies and where the opportunities lie. 

Again, it is important to mitigate risks when it comes to investing in big tech, especially since the sector’s adherence to antitrust laws is increasingly being called into question. It may be worth focusing on business-to-business stocks rather than high-profile business-to-consumer giants to avoid potential risks that increased regulation may present. 

The Bottom Line

One of the most important lessons we’ve learned from the unprecedented market events this year is that it is never too early to prepare for a financial crisis. What is most important is to have a healthy budget that reflects your current personal economic status and to put your money into market sectors that make sense. 

Do not jump to extreme measures and withdraw money from retirement plans, but rather think long-term and start an emergency fund composed of assets from optional expenses (vacations, eating out, etc.). Rash decisions during uncertainty have the potential to permanently damage your finances, so remember to always focus on long-term planning. 

David Flores Wilson is a managing partner at Sincerus Advisory, a financial services firm based in New York, NY. Follow David on Twitter @NYwealthadvisor.