I'm using the stock market drop to boost my retirement savings at a discount, and a financial adviser agrees it's the right thing to do
- I started a savings fund to take advantage of investment opportunities that might arise, particularly during an economic downturn.
- The coronavirus pandemic has caused a market crash, which is bad for my current investments. However, it also means investments I make now in the stock market are essentially "discounted."
- I'm building up my investment opportunity fund with the money I'm saving by not leaving the house and putting it all in stocks for my retirement savings.
- Find out who has the best high-yield savings account rate right now »
The threat of financial insecurity is pressing right now. Many of us, myself included, have already faced income loss.
I consider myself lucky in that I already had a hearty emergency fund saved up going into the coronavirus pandemic. That being said, I got a late start on saving for retirement - I just started putting money away for retirement in an investment account last year, when I turned 30. Less than a year later, in February 2020, the stock market crashed.
Rather than focus on the setback my already very humble retirement savings is experiencing, I've chosen to look at the bright side: stocks are cheaper right now, so it might be the best time to invest even more. I'm using my investment opportunity fund to do so.
What is an investment opportunity fund?
An investment opportunity fund is cash that you keep on hand ready to be invested when an opportunity arises. This could involve purchasing a property, starting a business, or investing in the stock market when it's down.
I started my investment opportunity fund recently when a financial adviser recommended having one as a way to prepare for a potential financial recession. When the market takes a turn downward, everything from the stock market to property can lose value. This is bad for current investors but good for future investors, who can take advantage of falling prices.
To be clear, this isn't about timing the market, particularly when it comes to stocks. You shouldn't hold off on investing until the market crashes or hold off on selling when the market is up. The most important rule to investing is to start early. Because of the way compound interest works, the earlier you invest, the more money you'll have in the long-run, even if a recession hits.
An investment opportunity fund is something you build in addition to your regular investments and retirement savings.
Why I'm building an investment opportunity fund during the coronavirus pandemic
I started building an investment opportunity fund a few months before the coronavirus pandemic hit, but it's still quite small. I've decided to save as much money as I can for the next few months and put it all toward that fund.
The stock market started to fall in February shortly after the coronavirus pandemic began to take off, and it's still falling. For some, it might feel like the worst time to invest. After all, there's a lot of economic uncertainty in the air, and given that businesses are likely to remain closed for a while and have difficulties recovering, we probably haven't seen the worst of it yet.
For me, this is the best time to invest.
Stocks are basically being sold at a steep discount right now. Even if stocks continue to plummet, history shows that they're likely to more than make up the value they've lost in the long run.
Given that I don't plan to retire for at least 20 years, and I don't need to withdraw my investments for anything else anytime soon, my portfolio has plenty of time to recover.
On top of that, I already have a year's worth of living expenses saved in an emergency fund, which I keep in a high-yield savings account alongside my investment opportunity fund. The way I see it, there's no reason for me to not pour my disposable income into the stock market and potentially provide an extra boost to my retirement savings.
How I plan to build an investment opportunity fund despite taking a hit to my income
As a freelancer, my workload has decreased a little since the coronavirus pandemic hit, resulting in a small loss of income. Luckily, I have very few fixed expenses and am saving a lot of money by not leaving the house.
I'm taking all the money I'm saving on things like travel, food, transportation, and activities, and putting it in my investment opportunity fund. I prefer low-cost index funds because they're inherently diversified and passively managed, and I already have an account with Vanguard, which is where I'll be investing my opportunity fund into stock "total market" index funds.
Most of us are facing the threat of financial insecurity right now if we haven't already experienced it. I'm making sure that I have enough cash on hand for emergencies and unemployment, but past that, I'm trying to find the silver lining. For me, that silver lining is the potential to boost my retirement savings at a discount.
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