There is nothing like an economic shock to drive home the message that financial professionals have been touting all along: A financial house, well managed, helps us reach our long-term goals and weather storms along the way.
Five of those biggest financial lessons from 2020 were:
- Emergency funds and diversification really are important.
- Never let emotion dictate your investment strategy.
- It is possible to spend less.
- Investing in your career can pay dividends.
- Financial guidance matters when the going gets tough.
Let’s explore each of those areas.
Emergency funds really are important
If you were among the millions who lost their job or experienced an income drop during the pandemic, then you already know how important it is to have extra savings set aside.
An emergency fund is a core component of any financial plan. Financial professionals generally recommend households maintain at least three to six months’ worth of living expenses (not income) in a liquid, interest-bearing account, such as a savings or money market account.
Those who rely on irregular bonuses or commissions, single-income households, and those who own their own business may want 12 months or more worth of living expenses set aside for extra security.
Beyond an immediate emergency fund account, for higher-income households that also may mean keeping a portion of investment portfolios in more liquid holdings.
“Probably the most important piece to any financial plan is cash position,” said Paul Tokarz, a partner with WestPoint Capital in Chicago, Illinois, a MassMutual firm with more than $100 million of assets under management. “Controlling and monitoring risk starts with cash and cash-like equivalents. We explain to our clients that cash on the sidelines allows for risk in short-term accounts — so that if there is a correction in the market, you don’t have to sell securities and you don’t have to go into debt. Most importantly, you have the cash on the sidelines to execute new contributions.”
Since the pandemic began, he said, many of his clients have taken that message to heart.
“More and more, we are seeing clients open lines of credit [such as home equity lines of credit] to position ‘cash’ opportunities and create safety nets,” said Tokarz.
Never let emotion dictate your investment strategy
The manic stock market swings of 2020 tested everyone’s mettle, making many investors keenly aware that they weren’t as risk tolerant as they once believed.
Between February 14, 2020 and March 23, 2020, the Standard & Poor’s 500 index lost roughly 33 percent. The rapid sell-off, however, quickly gave way to a steady increase in stock market gains that pushed equities into positive territory by year end.
According to a market analysis by MassMutual’s Head of Investments Daken Vanderburg, an investor who started 2020 with $100 on Dec. 31, 2019 and fell asleep after investing in the S&P 500, would have awakened with roughly $112 in their position by Dec. 31, 2020.
The lesson? Emotion should never dictate our investment decisions. If you have a well-balanced portfolio and a long-term strategy that fits your financial goals, risk profile, and time horizon, stay the course.
“The worst thing to do during volatility is panic and sell,” said Tokarz. “While it seems like the organic action to take, over the long term, timing the market is a very risky game to play.”
We really can live on less
In the early days of the pandemic, most Americans were spending less. In some cases, it was because they suffered a loss of income. In others, it was because there was little to spend money on.
By cutting out pricey restaurants, wardrobe upgrades, and travel plans, some even managed to sock money away for the first time.
As 2021 begins, now is a perfect time to reevaluate your savings and spending habits and create a new budget that permits you to live a little today, but prioritize long-term financial goals such as retirement.
Start by keeping track of your spending for several months so you know where your money is going and where opportunity exists to save.
Need some savings ideas? Keep those Friday night game parties going (via Zoom until the pandemic subsides) instead of meeting friends at the pub, stagger your trips involving airfare with staycations, unsubscribe from marketing lists that tempt you to spend, and tackle high-interest debt (credit cards) quickly so you can redirect those payments to something you value more.
You can also bolster your financial health by using unexpected sources of income, including bonuses, raises, and even federal stimulus checks if you receive them, wisely.
Investing in your career can pay dividends
During the pandemic, millions of Americans lost their jobs, either temporarily or for good. Others found themselves underemployed. In response, many used their down time to learn a new trade, obtain certifications, or even take college courses to better position themselves in the job market going forward.
Roughly 61 percent of U.S. workers who were looking for work in 2020 reported that they broadened their search to a new industry due to the pandemic, and roughly one-third said they viewed learning new technical skills as key to landing their next job, according to a Morning Consult survey commissioned by Amazon.1
Additionally, some 27 percent of respondents to the survey said they expected that some or all of their job skills would become irrelevant in the next five years, and roughly half said they would quit their current job to go to a different company if the new employer provided company-funded skills training. Most job seekers surveyed were attempting to transition into fields with stronger growth potential, including health care and technology.
If you are in an industry that is on the decline, or your earnings potential has capped out, career counselors say don’t be afraid to invest in yourself. After all, your income is your biggest asset.
Making a mid-career switch, of course, has significant financial implications, especially if you must assume student loans to make the transition. Carefully consider the pros and cons before you commit, which may include the opportunity cost of starting over at an entry level position.
Career counselors often suggest that it can be most cost effective to put your existing skill set to work, but augment it with minimal training and transfer to an industry with greater growth potential.
Financial guidance helps
Financial professionals help us juggle competing financial priorities on a finite income. They coach us on investment strategies that match our time horizon and tolerance for risk, they offer guidance when circumstances change, and they counsel us to protect our families with estate planning tools, life insurance, and disability income insurance.
Perhaps most importantly, however, they help keep our investment plan on track during times of market turbulence, as we experienced in 2020.
Tokarz said managing expectations and hand holding is a huge part of his practice.
“As we build portfolios, we educate on risk and we talk about future expectations of volatility from day one,” he said. “We want every client to know that it won’t be a 45-degree angle up of performance. There will be peaks and valleys. So long as they are comfortable with risk and have cash on the sidelines to solidify their risk … they should be okay.”
All too often, he said, investors panic in the face of bear market volatility and move their money to cash. Such knee-jerk reactions, however, leave those same investors sitting on the sidelines when the market recovers, causing them to miss out on upside potential and potentially lowering their long-term returns.
With 2020 in the rearview mirror (at last), now may be a good time to connect with your financial professional to ensure your strategy remains on track. If you don’t yet have a financial professional, it’s never too late.
The year of the pandemic brought us new ways to connect with those we hold dear, shined the spotlight on what matters most (our relationships and our health), and taught us all some important life lessons about the value of money management.
You are forgiven if you hope for fewer learning opportunities in the year ahead. We do too.
1 Amazon, “Press release: Amazon Announces Career Day 2020: 33,000 Corporate and Tech Jobs Open Across the U.S., plus 20,000 Free Career Coaching Sessions Available for Attendees,” Sept. 9, 2020.