At some point in their lives, the majority of Americans may feel the sting of unemployment, even if it is only for a few weeks. While having an emergency fund can be a great resource for keeping the bills paid without having to dip into investments, it can be difficult to continue building your long-term wealth during this time.
Here’s how some experts say you should invest if you’ve lost your job.
5 Ways to Invest When You’ve Lost Your Job
It can be nerve-wracking to think about investing when you’ve just lost your job, but it can also provide an opportunity for future success as you look for your next job. But you’re not going to win the long-term investing race next year or the year after anyway, so it’s absolutely essential that you solve today’s problems first.
Here’s how wealth advisors recommend you invest if you’re facing unemployment.
1. Invest in yourself
One of the potentially best investments you can make is improving your own skills, which will make you more employable later on. That may cost money, but it can also involve work.
“It could be something directly or indirectly related to your profession,” says Ed de la Rosa, certified financial fiduciary at Solid Ground Financial, a financial planner in Tampa. “For example, you may know Office products well, but how well do you know Google Suite products? Google offers a free certification course.”
Some newly unemployed workers may decide it’s time to go back to school for another degree while they wait out a recession. Or they may decide it’s time to change careers altogether, perhaps to something that better suits their interests or desires.
No matter how you look at it, if you invest in yourself, you can earn more later.
2. Keep an eye on your retirement account
“The biggest mistake would be to cash out your 401(k), especially if you’re under 59 ½,” says De la Rosa.
A 401(k) offers valuable tax benefits for retirement savers, including the ability to defer or avoid taxes on your investments altogether. So it’s a great way to save for retirement.
While cashing out your 401(k) can help you get back on your feet, it can derail your financial future. You will also likely have to pay taxes and penalties. Experts therefore advise that it really should be a last resort, and not something you do if you simply don’t want to make difficult choices.
Not having access to these 401(k) assets also gives them time to recover from what is likely a relatively low price. You avoid the ‘buy high, sell low’ actions of many investors.
“More importantly, you 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. If there is no income coming in, don’t feel pressure to invest new money.”
And while having a 401(k) with a former employer may leave a sour taste in your mouth, you shouldn’t be so quick to convert that account into an IRA either.
The newly unemployed “shouldn’t have to make quick decisions about their 401(k) or 403(b) or other retirement plans from previous employers,” said Morgan Hill, CEO and owner of Hill and Hill Financial, an investment planning firm in Atlanta. area. “Their new job might have a great new plan they can put that money into.”
And if that’s not the case? You still have the option to convert your retirement plan to an IRA.
3. Make safe short-term investments for the time being
If you just lost your job, it may make sense to keep your investments focused on potential short-term needs. And yes, investors have some great short-term investments, especially right now.
“The biggest risk is that a newly unemployed person will misunderstand their cash flow needs and underestimate how much savings they need and for how long,” says Shane Cummings, CFP, wealth advisor at Halbert Hargrove. “They could take cash that should be conservatively invested or simply kept in a high-yield savings account and instead put it into a very risky and concentrated stock position that drops dramatically.”
Cummings suggests everyone should have at least three to six months of emergency reserves, and more if your job is specialized or difficult to find. This money can be a good candidate for a high-yield savings account, or even a short-term CD, if you time your cash needs carefully.
The more money you keep in an emergency account, the better you’ll be able to weather a market downturn, giving stocks or stock funds — potentially your best long-term winners — time to recover.
“If you’re unemployed and need cash to cover living expenses, you could find yourself in a position where you’re forced to sell stocks at a big loss simply to make ends meet,” he says.
But if you have sufficient cash reserves, a recession can actually be an opportune time to take advantage of cheaper stocks and set yourself up for solid returns later.
4. Hold long-term investments for later
If, and only if, your short-term monetary needs are covered, consider investing in attractive long-term investments such as stocks, or at least keep the investments you already own. But you need to take a long-term mindset with stocks because of their high volatility.
“The history of the stock market shows us that over time, equities remain one of the best asset classes to invest in for long-term returns for those who can weather market volatility,” says Cummings.
Investors looking for attractive returns should look at broad stock index funds, such as those based on the S&P 500 index. The index has returned an average of about 10 percent per year over long periods of time, but with significant volatility along the way. So when investing in shares or equity funds, only use money that you will not need for the next three years.
Sticking to the long-term investing plan will likely serve you well over time, and it’s crucial that you don’t panic if you see your investments drop in a bear market.
“I find that the emotions that affect someone when they are unemployed have the biggest impact,” says Hill. “There is a tendency to overreact rather than make thoughtful adjustments.”
If you’ve developed a solid long-term investment plan during bad times, only modest changes may be needed during a recession. Stick to what works in the long term, such as maintaining a well-diversified portfolio of stock investments, rather than making fear-based decisions.
Younger investors are well suited to weather the market’s volatility, given the long time before they need the money. But those nearing retirement may need a different strategy, especially because they are sensitive to what experts call “sequence of returns” risk. That is, if the market falls just before they need to access funds, it could permanently harm their retirement income.
Cummings recommends a more diversified approach to prevent these near-retirees from losing too much. This process often involves adding bonds to a portfolio, as they tend to be less volatile than stocks and provide a steady stream of income over time, smoothing out stock performance.
Working with a financial advisor can help you implement such strategies. Bankrate’s financial advisor matching tool can help you find an advisor near you.
5. Strategize how you will respond if you are rehired
Although looking for a new job can take a lot of time, you can use the free moments to think about how you will invest when you earn a normal salary again. For example, it may make sense to supplement your emergency fund if you have had to rely on it.
If you reduced your expenses during your unemployment spell, it may make sense to keep your expenses low and put the savings into your 401(k) at your next job, De la Rosa says.
This strategy may allow you to take advantage of employer matching funds, helping you accelerate your savings even further. Once you’ve tapped into matching funds, many experts recommend contributing to a Roth IRA, another retirement account with valuable tax benefits.
Finally, with a new paycheck coming in, you can think about how you’re going to invest for the long term and protect yourself from future setbacks while building a comfortable savings pot.
In short
Unemployment can be tough, but it doesn’t have to derail your wealth if you take sensible steps beforehand, especially replenishing your emergency fund. The fund will help you sleep easier at night, while allowing your high-yield assets to come roaring back when the economy improves.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. In addition, investors are advised that the past performance of investment products does not guarantee future price increases.
