I know that a lot of people are thinking about their financial futures right now, so I sat down with Maria, Founder of FINANCE & stories to discuss investing during the COVID pandemic. The company has developed an investment app designed for women like me, so this was perfect as a woman re-entering the workforce. Below are her answers to some of my pressing questions.
The economy has slowed down, should I be investing in something where I can access my money quickly if my job gets cut?
Investing is always long term, no matter what kind of strategy you are considering, there are 2 aspects to that question:
- For situations with turbulence, we recommend an emergency fund, so that investments don’t need to be cashed in early. If you need to withdraw your money quickly, you shouldn’t be investing it.
- An economic downturn has positive aspects and is a good time for investors to enter the market. Two weeks ago the markets crashed, so now you have the chance to participate with a lower buy-in.
How has this pandemic changed how people should be investing?
Typical behavior for investors is, as seen during the 2008 financial crisis or 9/11, often to react emotionally and sell their investments ad-hoc. Don’t look at your portfolio, we can’t predict the future, but markets do tend to appreciate over time. Taking a short term view is never a good recommendation in investing – always keep a long term outlook.
Should we be buying or selling or just sitting tight right now to see how things progress?
If you are already invested, try to remain calm and sit it out. Selling now means realizing the loss.
If your 100€ investment has decreased to 80€ and you cash out, you have realized that virtual loss. Keeping it in means you have the chance to recoup the loss once markets balance out again over the next weeks, months, or even years. No one can predict how the markets will move in the short term; it is not unlikely that they will go down again after the self-isolation restrictions are removed and the effects on the economy this pandemic is creating become visible, but no one can say when or by how much. Investing is always a personal question.
If you believe the markets will recover over time, buy, if not, look for other options. So it’s really a judgment call.
In particular for expats, are there any rules or limitations to be aware of?
Yes, for instance when choosing a bank or service provider, they will often have restrictions. Due to US tax regulations, American citizens may not invest with investment service providers located in Germany. This is not an issue for Canadian or Australian citizens with German bank accounts, or other EU citizens.
You may also need to transfer money from a bank internationally, if so, take a look at these tips.
Are there any financial plans we should be making now to ensure that we are prepared for the next pandemic/financial crisis?
The classic recommendation is to keep 3 months salary in an emergency fund. We recommend instead to keep the funds necessary to live for 3 months. This includes rent, loan repayments, food, bills, possible unforeseen car repairs, etc. and set that aside as an emergency fund.
How can companies start preparing to tide themselves over until aid comes or things go back to normal?
Companies need a bit more than the 3 months cash reserve.
Here is where a CFO needs to be managing finances to make sure that companies have capital reserves of a bit more than 3 months.
This is where Lufthansa asking for a bailout after so many years of economic growth is showing failings in their liquidity management plan.
Freelancers or the self-employed are in a completely different situation where losing a contract due to social distancing would be devastating and not necessarily linked to a poor business model.
The longer the shutdown, the stronger the effect. Increasing government investments to shorten the duration of the crisis is our best bet to recover quickly as a country. Safely ending the shutdown as soon as possible is our surest way to economic recovery.
Is it OK to borrow from my retirement savings to get through this tough time?
1 – Try to avoid taking on debt. Before borrowing from investments, first try to reduce living costs, cancel contracts (i.e. fitness studios, Netflix), or rent out a room via Airbnb or another platform to earn extra income. You can use this link if you’d like to register a property with Booking.com and your first 5 listings will be commission-free. Try every other avenue before accessing investments, including selling an unneeded property: clothing, furniture, basement, and garage contents. Life in Düsseldorf has a list of the best apps to buy and sell your secondhand items if you need some more tips.
2 – Try for as long as possible to not take money out of your retirement savings – especially during an economic downturn during which you will realize losses of your investments.
3 – If you are concerned that you will need to access your money early, make sure to find flexible products with flexible withdrawal conditions.
