From evaluating your risk tolerance to diversifying your portfolio and more, financial advisors share their advice.

By Caroline Biggs
February 03, 2021
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A strong investment strategy should guide your decision-making when it comes to the timing and types of investments that make the most sense for you and your financial plan. "An effective strategy is typically goal-based," says Mark Haywood, a financial advisor at Northwestern Mutual. "It is also regularly fine-tuned to adjust to any lifestyle milestones or changes in your financial situation and goals." However, as the COVID-19 pandemic continues to impact the economy and the stock market, designing a sound investment strategy might be trickier than usual. "Throughout the past year, there has been increased uncertainty related to market fluctuations, which has an impact on consumers' risk tolerance and decision-making," Haywood explains. "Additionally, as consumers' goals and financial situations shift—in light of job loss or change, or increased savings due to social distancing—it has become increasingly important to reassess how these (and other) factors may have impacted financial goals, time horizon, and risk tolerance."

Interested in learning more about how you can build an effective investing strategy during a global pandemic? From evaluating your risk tolerance to diversifying your portfolio and more, three financial advisors share their advice ahead.

Evaluate your risk tolerance prior to investing.

Before you can start building a solid investment strategy, Amanda Holden, founder of Invested Development, says it's important to assess your risk tolerance—an investor's ability to withstand the potential of losing money on an investment—and accept both the ups and downs of investing. "Volatility is expected with investing, especially in the stock and real estate markets," she explains. "With any investment, risk and reward are two sides of the same coin. You don't get a chance at great gains without there being some risk."

Beef up your emergency fund.

If you're a first-time investor or someone looking for an investment with limited risks involved, Haywood says investing in your emergency fund is a productive place to start. "To help mitigate feelings of uncertainty regarding job security and potential market volatility, consider upping contributions to your emergency fund," he says. "Although interest rates on these accounts may be smaller, having this money set aside for unexpected expenses or circumstances can provide greater peace of mind."

Prior to the pandemic, Brandon Goldstein, a financial planner at Prudential, had recommended that an emergency fund should cover three-to-six-months of your expenses in a liquid account. "However, as a result of the pandemic, I am now recommending six to 12 months of expenses as a protective measure for your financial wellness in this time of uncertainty," he says.

Contribute to your 401(k).

Goldstein says another low-risk investment to consider during this unprecedented pandemic is continuing or increasing your contributions to a 401k account. "If you can, keep contributing to 401(k)s with a long horizon," he advises. "The market will continue to fluctuate but try to maintain the long-term perspective. Set goals where you would like to retire and figure how much money you will need to achieve that lifestyle and work backwards."

Explore IRA options.

While a 401(k) is a good place to continue building your nest egg, Haywood also suggests looking into an individual retirement account (IRA) for a long-term investment option. "Contributions to traditional IRAs are tax deductible, meaning they'll lower your taxable income, while Roth IRAs are funded with after-tax dollars (allowing you to enjoy tax-free distributions once you retire)," he explains.

Diversify your portfolio.

Above all else, our financial experts say that a sound investment strategy is one that includes a diversified portfolio. "Having a variety of investments within your portfolio helps ensure you don't rely on just one investment type for success," Haywood explains. "A good mix can also provide more opportunities for financial gain."

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