The Covid-19 pandemic taught us plenty about how quickly our daily lives and social interaction can change. While much has been written and we are adapting to these changes, there are also many financial lessons from the pandemic. These can save us money and keep you on track for your financial goals.
Below is a list of 5 financial lessons we can all learn from:
1) Volatility does exist. This is a friendly reminder for all who may have been lulled into a false sense of tranquility over the last decade. During recent years, we have had some of the lowest volatility in the equity markets as markets steadily and consistently climbed higher. As investors, we need recognize that markets do vary considerably over days, months, and even years. Sometimes these periods are material drops in the equity markets. But despite average intra-year drops of 13.8% in the S&P 500, annual returns are positive in 30 of the last 40 years. Keep that in mind next time markets are dropping.1
2) Market timing is impossible. In the depth of the COVID-19 crisis in March, cities, states, and nations went into lockdown. The investment world was in a full-blown sell-off, as the S&P 500 plunged from February 19th to March 23rd, 2020 by an astonishing 34%. It was one of the fastest sell-offs in decades causing investors to scurry to the exit doors. And yet on that day, March 23rd 2020, without warning, the selling was over and the S&P 500 rebounded by 50% by September 30th, 2020.2 The point here is that no one anticipated the massive sell-off and the massive run-up. It is why market timing is impossible.
3) Strong bond returns may have an unintended cost. To explain, as interest rates took a nosedive, corresponding bond yields also dropped. As of September 30th, 2020, the current yield on a 10-year treasury bond is a low .68%.3 This pushed the total return of the Barclays U.S. Aggregate Bond Index to 6.8% as of 9/30/2020 as investors were willing to accept lower interest payments and bid bonds higher.4 Fixed income returns moving forward can be limited given the historical yields on most bond securities. While bonds serve a purpose as a diversifier and as protection against the equity market volatility, low yields will limit returns.
4) Refinance. After announcing the challenges and future struggle with low bond yields in the previous lesson, this is the BIG positive of low rates. If you have an opportunity to refinance your debts (with mortgages at the top of the list), now may be the time. According to FreddieMac, the current mortgage rate for a 15-year fixed year mortgage is 2.37% while a 30-year mortgage is 2.87%.5 This is the silver lining for borrowers who have an opportunity to capture lower interest payments or a reduction in their term, or both!
5) Don’t ignore your financial plan: This is a broad-based mistake that needs recognized. Many savers and investors begin to panic and struggle to stick to a financial plan when the markets become volatile. Social distancing does not apply to your financial plan! You want to remain committed to your financial plan, and when the world seems chaotic, you should be buying and dollar-cost averaging in your investment vehicles and retirement plans. It is an easy way to stay focused on your long-term goals. If you don’t have a financial plan, take this opportunity to create one based on your goals, risk tolerance, and unique circumstances.
There are many other financial lessons to be gained from the current COVID-19 pandemic and other challenging times. Regardless, take the quick list above and apply it where possible to your financial situation. Most importantly, these tips can serve you in making more rational decisions when faced with abnormal times.
Sources:
1. Compustat, Factset, Federal Reserve, Standard & Poor’s, J.P. Morgan Asset Management
2. Compustat, Factset, Federal Reserve, Standard & Poor’s, J.P. Morgan Asset Management
3. Treasury.gov
4. Morningstar.com
5. http://www.freddiemac.com/pmms/#