13 Investing Rules You Should Break During the Pandemic
As the saying goes, some rules are meant to be broken. You might not think this applies to the rules of thumb about investing money, but some of the advice and investing strategies we’ve taken for granted have become antiquated, especially given that we are now in an unprecedented global pandemic.
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I chatted with financial advisors and other money experts to find out which rules are OK to break during a pandemic, ranging from tips for investing for beginners to rules for those cashing in on long-term investments.
Last updated: Feb. 23, 2021
The Rule: Buy Low, Sell High
This is perhaps the most entrenched investing rule: Buy when stock prices drop and sell when prices rise. While you’d think a pandemic means low stock prices, according to The Washington Post, the stock market — which initially saw a huge drop when COVID-19 began spreading wildly in the U.S. — has rebounded.
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Why You Should Break This Rule
“One issue is, how do you determine what ‘low’ is and when something is ‘high?’ This is all very subjective,” said Matt Nadeau, wealth advisor at Piershale Financial Group in Barrington, Illinois. “Also, this can lead to investors assuming an investment has value after it has experienced a large sell-off. However, often it has been sold for a good reason and can lead to buying a bad investment. In reality, investors should be looking to buy high and sell when investments move higher. The first rule of trading is to buy what’s making new highs, or in an uptrend, and sell what’s making new lows.”
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The Rule: Buy and Hold
The “buy and hold” strategy has long been championed by investing greats like Warren Buffett. The idea is to hold onto your investments — even through dips in their value — for overall long-term gains. The pandemic brings great uncertainty, however, and, according to Barron’s, will potentially change markets completely into the future.
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Why You Should Break This Rule
“I personally think that the ‘buy and hold’ strategy is outdated,” said Teri Ijeoma, CEO and founder of itradeandtravel.com. “Long-term investing has its place, but active investing is good for reaching short-term goals. In addition, many older brokers used to suggest to hold positions because the commission fees to buy and sell stocks were so high. Now, with online brokers like Charles Schwab and E-Trade going to zero commissions, a trader can actually make significant gains by moving their positions more actively. I personally encourage investors to sell their assets when stocks are expensive, like when we are near all-time highs, and buy when the market comes down and stocks are inexpensive. This is a good way to earn income for bills and goals that you have right now.”
The Rule: Go With Your Gut
Going with your gut, or “big idea investing,” is a principle based on the belief that trusting your intuition rather than hard data can end up being profitable. If COVID-19 has proved anything, it’s that sometimes your gut instincts are inaccurate. Better to turn to the experts.
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Why You Should Break This Rule
“The worst investment advice I’ve heard so many times is to go with your gut feeling,” said John Rampton, co-founder and CEO of Calendar, a calendar and time management app. “Never go on your gut feeling when it comes to investing in a company. Do the research by studying financial results, track record, sustainability, competition, the management team, etc. Just learn everything you can about the company and see if those metrics tell you to invest or not.”
Additionally, a pandemic is a time for making safe, careful decisions, rather than rash ones.
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The Rule: Invest In Brands You Love
According to this rule of thumb, when choosing investments you should stick with companies you are personally familiar with and that you admire. In times of national crisis, it’s natural to want to reach for what feels safe.
Why You Should Break This Rule
“Don’t invest in brands you love and use personally,” said Chalmers Brown, co-founder and CTO of Due, a provider of online payment services. “It seems like a good idea, but it’s really the worst direction. Instead, focus on those companies that show sound financial results. Even if the industry isn’t ‘sexy’ or interesting to you personally, it could be quite lucrative.”
The Rule: Only Invest In Passive Index Funds
Many investors are putting most or all of their assets into index funds, a type of mutual fund with a portfolio designed to match or track the components of a financial market index such as the S&P 500. These passive funds have low operating expenses and low portfolio turnover and follow whichever index they track.
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Why You Should Break This Rule
“The trend of investing solely in passive index funds is misguided, bad advice,” said Saul Cohen, CEO of investment firm Round.
Michael Burry, the well-known investor featured in “The Big Short,” has expressed his concerns about passive fund investing, warning, “The theater keeps getting more crowded but the exit door is the same (size) as it always was.” Meanwhile, billionaire investor and CEO of DoubleLine Capital, Jeffrey Gundlach, warns against this herding behavior, stating passive investing has reached “mania status.”
Cohen added that when investors “start selling out of their passive ETFs during a recession (or pandemic), there can be serious implications for not only the markets but also these ETF providers. ETFs may fire-sell securities, resulting in sharp price declines. ETF providers may get squeezed with an inability to meet investor redemptions in a timely manner. This may even create a scenario where the Federal Reserve has to get involved and provide liquidity. Given this notable risk facing the markets and these large passive ETF providers, it may be time to rethink our commitment to these products.”
Read: The Complete Guide to ETFs
The Rule: Diversify
When creating a portfolio, you should diversify your assets as much as possible to minimize risks, according to this rule of thumb. And in a pandemic, many people become more risk-averse than ever.
Why You Should Break This Rule
“‘Diversify’ is the most common advice for investing,” said Jon Bradshaw, co-founder and president of Appointment, which provides appointment services. “While it’s not necessarily bad advice — I recommend diversification for your overall investment strategy in terms of the types of investment products — if it is within the area of stocks or within real estate or whatever other sub-segment of your investing, stick to those companies or investments that deliver the returns. In some cases, that may mean one type of real estate or one industry, like robotics. Just stick to those basics, and focus on education and results.”
Nate Nead, CEO of InvestmentBank, echoed this idea: “Investment diversification is one investment rule to which many advisors adhere religiously. Unfortunately, diversification does not eliminate all risk. Yes, it does help to soften idiosyncratic risk, but the returns can be even less predictable. In fact, some of the highest returns come from concentrated, controlled investments. Truly, focus creates wealth and diversification helps preserve it.”
The Rule: Investing In Stocks and Bonds Is Sufficient To Have a Diverse Portfolio
Diversification simply means investing in different assets, and for many people, this just means investing only in a mix of stocks and bonds.
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Why You Should Break This Rule
“In a crisis (such as a pandemic), stocks and bonds can be too correlated, therefore additional diversification is necessary,” said David McAlvany, CEO of Vaulted, a mobile web app for investing in gold. “Investors would benefit from breaking this rule and adding precious metals as an investment portfolio diversifier. Gold can actually serve as an effective long-term enhancement to a stock and bond portfolio. It’s quite common for precious metals to provide above-average returns when stocks and bonds are not doing well.”
The Rule: 110 Minus Your Age
This rule is used to figure out your portfolio’s ideal stock and bond allocation. Subtract your age from 110 to determine how much of your portfolio should be invested in stocks. The remainder should be invested in bonds. If you follow this rule, someone who is 30 should have 80% of their portfolio in stocks and 20% in bonds, while someone who is 60 should have 50% in stocks and 50% in bonds.
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Why You Should Break This Rule
“It is true that as we near retirement, adding bonds gives your portfolio more predictability, yet such a hard-and-fast rule makes little sense,” said Rob Berger, Forbes deputy editor and author of Retire Before Mom and Dad. “There’s not much difference between having 40 years before retirement and having 20. Yet a 20% shift toward bonds is huge.”
The Rule: Shift Investments From Riskier to Safer Assets as You Age
This rule complements the “110 minus your age” rule. It’s generally believed that as you age and get closer to retirement, you should have less money in risky investments so that if the market were to tumble, you’d still have enough funds in safe investments to retire.
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Why You Should Break This Rule
This rule doesn’t work for everyone, said Judith Corprew, executive vice president at Patriot Bank in Stamford, Connecticut.
“It depends on your circumstances,” she said. “For example, if you have a job that provides a generous defined-benefit pension plan, you could choose to keep some of the money you would otherwise have saved for retirement into investments that offer higher rewards and higher risks.”
The unpredictability of the market due to the pandemic, and the unknowns about whether there will be a vaccine or cure any time soon, are considerations that should play into your strategies right now.
The Rule: Industry Size Matters
Many prospective investors believe that industry size, serviceable available market and total addressable market are the most important factors to consider before making an investment.
Why You Should Break This Rule
“If investing at a very early stage, concern over industry size is a waste of time,” said Phil Stover, co-founder of Blue Skies Ventures, which builds, advises and invests in startups. “I hear investors who are so curious about size of industry and SAM (serviceable available market)/TAM (total addressable market). It always feels like an academic question to me. The founder and team, and having a product that fills a market need or is clearly appealing to users, are much more important.”
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The Rule: A Home Is Always a Good Investment
As far as investment options go, buying a home has traditionally been seen as a good one because of the general belief that real estate values tend to trend higher over time.
Why You Should Break This Rule
“Many people mistakenly believe that real estate is a good and safe investment,” said Robert Johnson, professor of finance at Creighton University’s Heider College of Business. “They fall prey to stories of real estate values rising dramatically over long periods of time. What they don’t realize is that from 1890 to 1990, the inflation-adjusted appreciation in U.S. housing was just about zero. That amazes people, but it shouldn’t be so amazing because the cost of construction and labor has been going down. By over-investing in real estate, many individuals ‘crowd out’ other investment opportunities — like investing in stocks and bonds.”
Additionally, according to Bloomberg, a pandemic is a terrible time to buy a home as it means taking on a mortgage in a time of economic uncertainty.
The Rule: Withdraw 4% From Your Investments Each Year
The “4% rule” states that retirees should withdraw 4% from their retirement investment accounts, such as a 401(k) or IRA, each year. The rule is based on the idea that this withdrawal rate will keep a steady income stream coming to the retiree throughout their retirement years.
Why You Should Break This Rule
“How much a retiree should withdraw from (their) portfolio each year is a somewhat ambiguous rule of thumb,” said Regina Saio, a Fidelity financial consultant in Lake Grove, New York. “It all depends on the income, expenses, assets and clients’ goals. Each client’s scenario is different, and a certified financial planner can work with a client to determine what is a sustainable withdrawal rate for each individual client. There have been studies that suggest the number should be 3% due to longevity, but each person’s situation is unique. The ultimate goal is (to not) run out of money.”
With the U.S. back in a recession due to the COVID-19 pandemic, retirees should take extra care to consult with their financial planners about the wisest course of action.
The Rule: Liquidate Taxable Income Accounts First
Conventional wisdom regarding your withdrawal strategy states that you should take money from taxable investment accounts first, followed by tax-deferred accounts and then from tax-free accounts.
Why You Should Break This Rule
“It’s possible to be ‘too good’ at tax deferral, where the IRA grows so large that future withdrawals actually drive the retiree into higher tax brackets,” Piershale Financial Group’s Nadeau said. “As a result, there can be more tax-efficient distribution strategies — for example, taking partial withdrawals from IRA accounts earlier rather than later to reduce exposure to higher tax brackets in the future. However, it’s very important to not take so much from your IRAs that your tax bracket is driven up. Taking a blended approach can allow a portfolio to last significantly longer than using the conventional method for distributions.”
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Gabrielle Olya contributed to the reporting for this article.
This article originally appeared on GOBankingRates.com: 13 Investing Rules You Should Break During the Pandemic
