COVID-19 has us all wondering what’s next? Will we have a job? Will we be able to afford our bills? What will happen to our investments?
While no one has the answers, we can all do our part to prepare ourselves for the worst.
Even though the pandemic itself may have taken us by surprise or at least the severity of it, the time inside with social distancing has made it much easier to focus on things we tend to neglect, like our finances.
Now is the time to consider safer investments – not to pull out of the market entirely, but rethink your strategy, review alternate options, and yes, even take some action.
Now isn’t a time to invest in risky investments; instead, you want investments that will provide a steady rate of return, regardless of market conditions.
The Path to Recovery from Negative Returns
Here’s the problem. Yes, you could ride out the storm, so to speak and wait for the market to bounce back, but at what cost? The larger your loss, the more it takes to recoup the loss. In other words, it takes longer to get back to your break-even point.
For example, if you suffered a 10% loss, it takes an 11% increase to get back to where you started. Now, if you suffered a 50% loss, it requires a 100% increase to get back to where you started. In today’s market, a 50% or greater loss isn’t unheard of because we honestly have no idea what’s going to happen next.
A Safer Investment to Consider
So should you pull out of the market completely? The likely answer is no, its not likely that a full retreat is going to be the best solution, but there are definitely other investment options that are safer because they aren’t impacted by the market.
Private mortgages are one such investment that you may want to consider.
When you invest in private mortgages, you invest in real estate, but without the risk and pressure on your shoulders. You aren’t the landlord – you don’t have to worry about doing midnight repairs, keeping up the home, or vetting potential renters. As a private mortgage investor, you get the benefit of investing in real estate but with a much with far more benefits, including a fixed rate of return.
What is a Private Mortgage?
Private mortgages typically have much shorter terms than your traditional mortgage, so you can breathe a sigh of relief – you aren’t investing for the next 30 years. Instead, they are shorter-term loans that have a higher interest rate than borrowers typically get from traditional lenders.
Borrowers that take these loans typically don’t qualify for traditional financing, so they turn to investors like to you to help them out.
They aren’t necessarily ‘risky’ borrowers – they are borrowers with an extra layer of risk, such as they are self-employed, are buying the home as an investment, or they can’t prove their income the traditional way.
When you invest in a private mortgage, you do so with many other investors. You aren’t funding the entire loan. Instead, you pick and choose the loans you want to invest in based on its parameters and the borrower’s qualifications.
You choose the loans based on the risk and the return of each individual mortgage. Since the rate of return is locked in by the contract, you don’t have to worry about what’s happening in the market. Your rate of return will remain the same no matter what.
The Risk of Default
Of course, as with any investment, there’s a risk, but with a private mortgage, the risk of default is minimal. First, most homeowners will do what they can to avoid losing their home.
If they are at risk and know they can’t afford the mortgage, they will typically do what they can to sell the home themselves and pay off the loan before losing it.
If a borrower does default, though, you have the benefit of the home as collateral. The lender that holds the loan (and that’s you and the other investors paid) will take possession of the home according to the law.
Once the lender has possession of the home, they can sell it. Once they receive the proceeds of the sale, they disburse the funds according to each investor’s investment plus any interest and penalties you are owed.
Why Consider Safer Investments?
During COVID-19, we all have to do our part to protect ourselves financially, and for many, it has been an eye-opener.
Some have been forced by changes to our employment, or self-employed income to reassessing our spending, consolidating our debt, and investing a little more wisely.
If you still have a job and have a decent emergency fund set up, there’s no reason to give up your chance to invest, however, it is a good time to review all options and potentially invest in something a bit safer.
Build An Emergency Fund
It’s important to look at the pros and cons of all of the options at your disposal. As we said before, the most important thing is to make sure you have a decent emergency fund.
At this point, savings of at least 12 months of expenses isn’t unreasonable, since no one can predict what will happen next, regardless of how improbable that amount may be.
Even if we can come out of quarantine quicker, that doesn’t mean the economy is going to just bounce back right away. It may take some time before you are working regularly and able to get back to your pre-COVID-19 life.
Use this time to reassess your situation and invest wisely. It’s important to still think of your future and plan for retirement, but more cautiously.
If you suffer a loss, who knows how long it will take to bring yourself back.
If you’re closer to retirement than you are your young adult years, it’s crucial that you pull back and be conservative with your investments as your time to retirement is much shorter than a young adult just starting out in life.
As we all take precautions, now is a great time to take stock of your financial life and see just where you can make changes to make things less stressful for you.
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