The coronavirus pandemic has taken the world by storm, and it’s not over yet. The number of COVID-19 infections has spiked dramatically across the country, according to data from the Centers for Disease Control and Prevention (CDC), and many businesses are closing their doors again shortly after reopening.
The stock market, however, doesn’t appear to be bothered by the pandemic.
This disconnect could appear promising for older adults nearing retirement age, because you may have watched your investments bounce back after a nasty fall earlier this year.
However, there’s one big reason you might need to adjust your investments right now, no matter how positive the stock market appears.
What a second wave could mean for the market
Of course, there’s no way to predict exactly what the stock market will do. By nature, the market is unpredictable, and it surprised even the experts when it made its remarkable recovery last month. But that volatility can be dangerous, especially if we’re headed toward a second wave of COVID-19.
The number of U.S. coronavirus infections has increased sharply in the last couple of weeks. During the peak of the pandemic in early April, the country saw around 46,000 new infections in a single day, according to the CDC. In just the first few days of July, though, there were more than 50,000 new infections each day. Based on these numbers alone, it doesn’t look like the coronavirus pandemic is even close to being over.
If a second wave slams the country, it could cause the stock market to plummet once again. Businesses could be forced to lay off even more employees, and the spike in unemployment could have a disastrous effect on the market and the economy.
Preparing your investments for a second wave
While it’s tough to prepare for an uncertain future, many older adults aren’t ready for another market crash.
In late 2019, nearly 40% of baby boomers were investing more than they should in stocks, research from Fidelity Investments found, putting their investments at risk in the event of a market crash. Even after the market downturn earlier this year, only 10% of boomers made adjustments to their investments, Fidelity revealed in a more recent report.
The closer you get to retirement, the more conservative your investment portfolio should be. By investing heavily in stocks, you could potentially watch your savings take a nosedive if the market crashes. That can spell disaster if you’re only a few short years away from retirement, because you won’t have much time to let your savings recover. If you’re investing more conservatively, though, your savings won’t be as affected by what the stock market does.
How much should you invest in stocks?
Exactly how much you should invest in stocks versus more conservative investments such as bonds depends on a few factors, including your age, how close you are to retirement, and your tolerance for risk.
In general, the older you are and the less time you have to save for retirement, the less you should invest in stocks. Similarly, if you’re extremely risk-averse and are nervous about your investments losing value, investing more conservatively can give you peace of mind when the market is volatile.
Keep in mind, though, that investing too conservatively can also be risky. Even if you’re nearing retirement age, you should still allocate at least a small portion of your portfolio toward stocks. You’ll still want your investments to continue growing even after you retire, and stocks can help you achieve that more easily than investing solely in bonds and other conservative investments. But you probably don’t want the vast majority of your portfolio to be comprised of stocks if you’re planning on retiring within the next year or two.
Right now is a great opportunity to take a look at how your investments are allocated, to ensure you’re not investing too heavily in stocks. By waiting until the market crashes to make adjustments, it will be too late and you’ll likely have lost money already. But by shifting your investments appropriately now, you’ll be prepared for nearly anything.
— Katie Brockman
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Source: The Motley Fool