SMI's Mark Biller was on the radio again today, discussing the financial impact of the coronavirus pandemic.
This time, he spoke with Ken Brooks and Deb Gustafson of Ken and Deb Mornings, a program produced by Moody Radio Quad Cities (covering portions of Illinois and Iowa).
The brief segment focused primarily on personal-finance aspects of the pandemic, and included a discussion about making wise use of the direct cash payment many of us will receive soon from the Treasury Department.
Listen below, or scroll down to read the transcript.
Deb Gustafson: The COVID-19 pandemic is having an impact on more than just the physical health of this nation. This pandemic has wreaked havoc on our economy and also our personal investments. So this morning, we're going to get some help and help for our financial health with Mark Biller, who is executive editor of Sound Mind Investing. And good morning, Mark.
Mark Biller: Good morning. Glad to be with you.
Ken Brooks: Let's start off with asking during this time of the real uncertainty that we have in our country right now. What do you think we can or should be doing to prepare for maybe even a lengthy downturn financially, Mark?
Mark Biller: I think that the biggest priority, Ken, is focusing on really being prepared for unexpected economic impact. You know the government has stepped in with some support there, and that's going to be helpful for people. And I think that it's important that we keep first things first as we think about that.
That first priority clearly needs to be building up an emergency savings reserve. Financial planners typically recommend that people try to have three to six months of their living expenses tucked away in emergency savings — something safe, easy to get to, a savings account, nothing fancy. And given the level of uncertainty with the economy right now, I would definitely encourage folks to be leaning towards the longer end of that spectrum.
So I think before we get into any other types of financial priorities, we really need to be focused on making sure that emergency savings is shored up as much as possible.
Deb Gustafson: Mark I'm sure some of our listeners are nearing retirement and they're getting very nervous about what is happening with the stock market. What should they be doing really to prepare to respond if they're close to retirement?
Mark Biller: Yeah. Unfortunately, you know, the real time to prepare is probably past, because we're well into the decline with the stock market. Now, hopefully, folks that are close to retirement have been taking the traditional advice to gradually bring the risk level of their portfolio down as they've been approaching retirement age. And that would mean less stocks and more bonds.
Now, the tricky thing is for someone who has not done that gradually as they have approached retirement, it's kind of tough in the middle of a bear market to say, "Well, now I'm going to sell stocks and move that money to bonds" because those prices are already depressed. So I wouldn't necessarily go overboard with doing a lot of selling now because you're locking those losses in. That's not to say there won't be further losses but, you know, we might be in more of have a ride-it-out kind of a situation for somebody who has not taken those steps. But hopefully, folks have already de-risked their portfolio a little bit.
For longer-term investors, if you've got at least a 3- or 5-year timeframe, and this may even apply to some folks who consider themselves close to retirement age — you're not going to take all of your money out of your investments on the day you retire. So that timeframe is actually a little longer than some people really imagine. They think, "Well, I only have three years until I retire." Yeah, but you're probably going to continue to invest for another 10 or 20 years in retirement! So given that kind of a timeframe, it makes it a little bit easier to be thinking about the 3-to-5 years maybe that it might take for those stock investments to come back from today's levels and get back to new highs.
And that really is important because a lot of folks might be inclined to "panic sell" at this point. That probably would be a mistake, and might be more harmful than actually helpful at this point.
Ken Brooks: Mark, do you have kind of any insights on maybe how long it might take to recover from the results of what's going on right now?
Mark Biller: Yeah, that's a really difficult question, because we just don't have much visibility on what the ultimate impact of this is going to be. You know, what we can do is we can look back at past examples. We went through a pretty significant financial crisis — about a dozen years ago in 2008 — and we know from that experience, that it took the stock market, the better part of about three years, maybe just a little bit longer to recover those losses.
Now, there have been examples in the past where it didn't recover quite that quickly. But I think that that's a shorter timeframe than a lot of people recognize. And it was similar actually with the bear market in 2000 to 2002 — took about three years, give or take a little bit. So that's a better timeline than a lot of people expect.
What's difficult with this situation is obviously with this health component, the virus component. We just really don't have a playbook. We don't have a historical comp for this one. We don't know what the next six months or 12 months are going to look like for the economy.
And that's why, you know, we lead off here with this focus on really trying to make sure that you've got the emergency side of your financial picture, as shored up as much as possible.
Deb Gustafson: And, Mark, thinking about maybe some relief that's coming our way the government's going to be sending probably a majority of Americans a check. How should people work through how to use that, and what should be the process of thinking what's the wise way to invest that or to use that right now?
Mark Biller: Yeah, well, I think that — in following with what we've been talking about — the first priority is to look at your emergency savings situation. And if you don't feel like you've got, I would say six months of living expenses and very liquid savings type accounts, then I would absolutely encourage people to take that direct government support that's coming and use that to shore up that emergency savings. Now, you know, I use an online savings account for that type of emergency savings — personally, I use Capital One, just because it's easy to link to my local checking account and I get a little bit better interest rate with that online savings than I would at my local bank. But the key is just to have that safe and liquid and available if you need it.
Now, if you're in a good position with your emergency savings already, then you can look to maybe a second step, which would be to apply that to any debt you might have. Credit card debt is usually the highest interest rate but any other high-interest consumer debt. Definitely paying that down is always a good idea because you're essentially earning the interest rate that you would otherwise be paying. And that's a guaranteed rate of return, which you're not guaranteed any rate of return in the current market environment otherwise.
So emergency savings first, paying down debt second. And if you are in good shape on both of those, only then would I consider investing that money.
In that situation, a Roth IRA is a great option, primarily because a Roth IRA allows you to withdraw your contributions without a penalty later. So if this economic crisis lasts longer than expected and you do find yourself needing that money you can get at it even from a Roth IRA without a penalty. So I like that vehicle if you're going the investing route.
Ken Brooks: That's Mark Biller. He is with Sound Mind Investing and also a regular contributor to MoneyWise Live, which you'll hear every weekday at 3 o'clock here on Moody Radio. Mark, always good to have your wisdom. Thank you so much for joining us this morning and talking about this very serious subject.
Mark Biller: Well, you're welcome. Thank you both for having me.