At some point in their lives, most Americans may feel the pain of being unemployed, even for a few weeks. It can be a great resource for continuing to pay the bills, but it can be difficult to continue building long-term wealth during this period.
Here’s how experts say you should invest when you lose your job.
5 ways to invest when you lose your job
Thinking about investing when you’ve just lost your job can be nerve-wracking, but it can also present an opportunity for future success when looking for your next job. You can’t beat , so it’s absolutely vital that you address today’s issues first.
Here’s how wealth advisors suggest investing when you’re facing unemployment.
1. Invest in yourself
One of potentially the best investments is to upgrade your skills so that you can be hired later. It may cost money, but it may simply do the work.
Ed de la Rosa, Certified Financial Trustee for Solid Ground Financial, a financial planner in Tampa, said: “For example, you may know a lot about Office products, but how much do you know about Google Suite products? Google offers free certification courses.”
Some newly unemployed people decide it’s time to go back to school for another degree while they wait for the recession to subside. Alternatively, you may decide that it’s time to change your career completely. Perhaps you can change it to something that better suits your interests and desires.
Either way, investing in yourself can help you earn more money later.
2. Protect your retirement account
“The biggest mistake, especially if you’re under 59 ½, is cashing your 401(k),” says De la Rosa.
A 401(k) provides valuable tax benefits for retirement savers. This includes the ability to defer or avoid taxes on investments. As such, it’s a great way to save for retirement.
Cashing out your 401(k) may help you get back on your feet, but it can derail your financial future. You will also have to pay taxes and fines. That’s why experts advise that it really should be a last resort and not something you do when you don’t want to make a difficult choice.
Not accessing these 401(k) assets also gives them time to bounce back from prices that are likely to be relatively low. You can avoid the “buy high, sell low” behavior of many investors.
“More importantly, we want to make tough financial decisions from a position of strength, both financially and psychologically,” says de la Rosa. “So don’t make big decisions while you’re unemployed. Don’t feel pressured to invest new money if your income drops to zero.”
Also, a 401(k) with a former employer may leave a sour taste in your mouth, but don’t transfer that account to your IRA right away.
Newly unemployed people “shouldn’t make quick decisions about their 401(k) or 403(b) or other retirement plans from previous employers,” says Atlanta investment planning firm Hill and Morgan Hill, CEO and owner of Hill Financial, said. area. “Their new jobs may have great new plans to which they can transfer those funds.”
If not? You still have the option to roll over your retirement plan to an IRA.
3. Make safe short-term investments for the time being
If you’ve just lost your job, it makes a lot of sense to keep your investments focused on your potential short-term needs. I’m here.
“The biggest risk is that newly unemployed people may misunderstand their cash flow needs and underestimate how much and how long they need to save,” says Shane of CFP, Wealth Advisor at Halbert Hargrove. Mr Cummings said. “Cash that should be invested conservatively or kept in a high-yielding savings account is instead put into highly risky and concentrated stock positions that can drop dramatically.”
Cummings suggests everyone should have at least three to six months of emergency reserves. This cash can be a strong candidate for a high-yield savings account or short-term CD if you carefully assess when you need it.
The more cash you keep in your emergency account, the more time you can weather a market downturn and give your stocks or equity funds (potentially your best long-term profit) time to recover.
“If you’re unemployed and need to find cash to cover your living expenses, you could find yourself in a situation where you’re forced to sell your stock at a huge loss just to make ends meet.” he says.
But if you have good cash reserves, a recession can actually be a great opportunity to take advantage of low-priced stocks and get solid returns later on.
4. Keep investing long-term for the future
Only if your short-term cash needs are met can you consider investing in attractive long-term investments such as stocks, or at least continue to hold on to what you already own. However, stocks are highly volatile and require a long-term mindset.
“The history of the stock market shows that stocks remain one of the best asset classes to invest in for long-term returns for those who can weather market volatility,” Cummings said. says.
Investors looking for attractive returns should consider a wide range of equity index funds, such as those based on the S&P 500 index. The index has averaged returns of around 10% per year over the long term, but with a lot of volatility along the way. Therefore, when investing in stocks and stock funds, only use money that you will not need for at least three years.
Sticking to a long-term investment plan will likely pay off over time. It is important not to get upset when your investment falls into a down market.
“I’ve found that the emotions that affect someone when they’re unemployed have the most impact,” says Hill. “There is a tendency to overreact to making thoughtful adjustments.”
If you had a solid long-term investment plan when the economy was booming, it may only need minor changes during a downturn. Instead of making fear-based decisions, stick to what works for the long term, like keeping a well-diversified portfolio of stock investments.
Younger investors are better suited to weather market volatility as they have a longer time before they need their money. However, those nearing retirement may need a different strategy. In particular, they are susceptible to what experts call “series of returns” risk. In other words, if the market falls just before you need to access your funds, your retirement income could be permanently damaged.
Cummings recommends a more diversified approach to ensure these near-retirees don’t suffer big losses. This process often requires bonds to be added to the portfolio. Because bonds are less volatile than stocks and provide a steady stream of income over time, smoothing the performance of stocks.
Working with a financial advisor can help you implement these strategies. Bankrate’s Financial Advisor Matching Tool helps you find an advisor in your area.
5. Develop a strategy for what to do when you return to work
Finding a new job can take a lot of time, but take advantage of the free time and consider how you’ll invest when you’re back earning a regular salary. For example, it makes sense to replenish emergency funds when needed.
If you cut back on your spending during a period of unemployment, it might make sense to keep your expenses low and save on your 401(k) for your next job, says De la Rosa.
With this strategy, you may be able to take advantage of employer matching funds to help accelerate your savings even further. After using a matching fund, many experts recommend donating to the Roth IRA. This is another retirement account with beneficial tax benefits.
Finally, with new paychecks rolling in, you can think about how to invest for the long term and protect yourself against future recessions while building a comfortable nest egg.
Losing a job can be tough, but if you take careful precautions beforehand, especially if you have an emergency fund on board, your assets won’t be ruined. The fund will allow you to get a good night’s sleep while allowing high-return assets to roll back when the economy strengthens.
Editorial Disclaimer: All investors are advised to conduct their own research on investment strategies before making any investment decision. Further, investors should be aware that past investment product performance is no guarantee of future price appreciation.