As the coronavirus COVID-19 has spread, the world has experienced an unusually high level of market volatility. Global markets are down, which can understandably feel painful for investors. But it also means that right now the markets are effectively “on sale.” Investing in the markets now is a lot less expensive than it was a few weeks ago.
We never recommend trying to time the market. Studies have shown that even professional investors don’t consistently get it right. But if you’ve been waiting to start investing for the long term — and by that, we mean investing money you don’t anticipate needing within 3-5 years — there’s really no excuse not to start now. We’re currently in a bear market, and our historical analysis shows that bear markets recover in well under two years on average. That means on average, investors who stayed invested after a bear market have historically earned more than a 20% return over the next 1.7 years. Investing in these conditions can work to your advantage, as you’re buying when prices are low and you’ll be in the market for the recovery.
How should you invest? First and foremost, we think you should use a long-term passive investing strategy because it’s a time-tested approach that consistently leads to much better outcomes. We don’t encourage stock-picking as an investment strategy, although as with all things, it’s fine in moderation.
Ready to get started? Here are four important elements of a sound investing strategy.
1. Get the basics right
To use a long-term passive investing strategy, set up a diversified portfolio of low-cost index funds that aims to maximize your returns while keeping you in your risk comfort zone. Once you’ve done that, you’ll need to make sure your portfolio maintains the right investment mix for your risk tolerance — otherwise, your portfolio makeup will drift over time.
Wealthfront builds a diversified portfolio for you after assessing your risk tolerance and then automates best practices so you don’t have to worry about the details like rebalancing, dividend reinvestments, and tax-loss harvesting. We do this for a range of account types that are suited to a variety of long-term goals. We offer taxable investment accounts for general investing (individual, joint, and trust), retirement accounts (traditional IRAs, Roth IRAs, SEP IRAs, and 401(k) rollovers), and college savings (529 plans).
2. Keep an eye on fees
Fees can destroy your return, so it’s important to be conscious of the fees you’re paying when you invest. Many advisors will charge commissions, transfer fees, and account closing fees just to name a few.
Wealthfront believes in keeping your fees as low as possible. We use low-cost ETFs and only charge a low 0.25% advisory fee, which is about a quarter of what most investment managers charge.
3. Minimize your taxes
Part of investing is accepting that some things are out of your control: market performance and volatility, for example. But you can work to minimize the taxes you’ll owe on what you earn, leaving more money in your pocket.
Wealthfront offers an unparalleled suite of tax-minimization features. Our software assesses each individual’s portfolio and automatically executes these strategies when we determine they’re beneficial to your account. Our Tax-Loss Harvesting and Stock-level Tax-Loss Harvesting take advantage of daily market volatility to harvest losses that can be used to offset your taxable gains, and our rebalancing methodology is sensitive to the taxes you’ll incur when your account is rebalanced. We also minimize your taxes while transferring between brokerage accounts and when you make withdrawals.
4. Prioritize convenience
Wealthfront believes in building products that make it easy to manage your financial life. This means whether you use our investment accounts, our Cash Account, or planning experience, all of it can be done on your phone. Using Wealthfront means no visits to bank branches and no meetings or calls with advisors. Instead, you can manage your accounts, make deposits, and plan for your goals right from our app. Our clients are delighted by the fact that they don’t have to speak with anyone to use our services, but when they do have questions about their accounts, we have a highly trained and licensed Product Specialist team available to help.
We know the recent volatility has been unnerving, but if you’re saving for the long term, we urge you to tune out the noise. Financial markets have historically increased in value in the long run, and we don’t expect this time to be any different. It’s not possible to time the market, and we don’t think you should try. But if you’re saving for the long term, now’s a great time to consider investing and building wealth for the future.
The information contained in this communication is provided for general informational purposes only, and should not be construed as investment advice. Nothing in this communication should be construed as an offer, recommendation, or solicitation to buy or sell any security. Any links provided to other server sites are offered as a matter of convenience and are not intended to imply that Wealthfront Advisers or its affiliates endorses, sponsors, promotes and/or is affiliated with the owners of or participants in those sites, or endorses any information contained on those sites, unless expressly stated otherwise.
Investment advisory services are provided by Wealthfront Advisors , an SEC-registered investment adviser, and brokerage products and services, are provided by Wealthfront Brokerage LLC, member FINRA / SIPC. Wealthfront Software LLC (“Wealthfront”) offers a free software-based financial advice engine that delivers automated financial planning tools to help users achieve better outcomes.
All investing involves risk, including the possible loss of money you invest, and past performance does not guarantee future performance. Please see our Full Disclosure for important details.
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The Wealthfront Team believes everyone deserves access to sophisticated financial advice. View all posts by The Wealthfront Team