Kevin Michels, CFP®, EA
The past three weeks haven’t been fun. COVID-19 has impacted the stock market in a historical way.
It was only 16 (trading) days ago that the S&P 500 reached an all-time high. Since that time, the market has dropped about 25%.
Many of you are taking this in stride, others are a bit jittery, while some are freaking out (and that’s okay).
We can’t control the panic selling that is driving the markets down, however, we can control our response. And this swift drop in the market can actually present some opportunities.
Accelerate Investment Contributions
Large US stocks are down about 25% while Small US and International stocks are down about 35%. Is there a very real probability that the market falls significantly more? Yes, but speculating on what the markets will do in the short-term is just that… speculation.
At this time, we have the option to buy stocks at a heavy discount. If you’re currently saving in any type of investment account and have the cash flow to accelerate your contributions, now is a great time to do it.
For example, if you are making monthly contributions to a Roth IRA with the goal to max it out by the end of the year, consider front-loading your contributions now.
If you’ve had cash on the sideline waiting to invest, invest it. Yes, you could potentially buy in even lower than we’re at now, but you also run the risk of waiting too long and missing the opportunity.
Roth IRA Conversions
If you were planning on performing any Roth IRA conversions this year, now is a great time to do it. At today’s lower prices you can convert more shares of your investments and when the market recovers, ride all of that growth back up, completely tax-free.
Revisit Your Asset Allocation
Many of our clients have been waiting for an opportunity to invest a bit more aggressively than they have in the past. Now is a great time to move some of your bond investments to stocks, if and only if, you still maintain an appropriate asset allocation for your situation.
Your asset allocation (mix between stocks and bonds) depends on your risk tolerance (how comfortable you are with risk) and your risk capacity (how much risk your financial plan says you can take).
Making a small change, say from 70% stocks / 30% bonds to 85% stocks / 15% bonds, allows you to sell bonds while they’re high and buy stocks while they’re low.
Before any decision is made, it’s important that we revisit your financial plan, have a good discussion about the pros and cons, and come to a conclusion together.
Any change shouldn’t be based on market timing with the idea that in the near future you’ll go back to your original allocation. It should be based on your long-term plan and whether or not the more aggressive allocation is appropriate for your current and near-term situation.
Tax Loss Harvesting
Tax loss harvesting is the practice of selling investments in a taxable account that have experienced a capital loss in order to claim the loss on your tax return.
One caveat to tax loss harvesting is you can’t purchase the same investment within 30 days or your loss will become void.
In order to not miss out on a quick rebound in the investment we sell at a loss, we can purchase a similar investment (but not a substantially identical one) that behaves similar to the investment we sold. Then, after the 30-day period has been fulfilled, we can sell the replacement investment and repurchase the original.
Over the past few weeks mortgage rates have hit all-time lows as the anticipation of a rate cut by the Fed came to fruition.
Consider your options when it comes to refinancing. Be wary of resetting the length of your mortgage if you’ve already made some headway on it, even if your payment would drop.
In some scenarios, we’ve had clients who have been able to refinance from a 30-year to a 20 or 15-year with only a small increase in their monthly payments.
We ask you to include us in any consideration you make when it comes to refinancing.
All of our clients have a financial plan for a reason. It’s times like these that we can find a bit of peace in knowing that we have stress-tested these types of scenarios and know what needs to be done in order to keep you on track.
We’ve had many conversations over the past three weeks with clients, and we expect to have many more as we proactively reach out to each of you and field your calls.
On that note, I feel very grateful for the many conversations I’ve had with all of you. Most everyone has asked how I’m doing with everything that’s going on. What a great blessing to work with so many great people.
We experienced an amazing 11-year bull market and we’re now in the midst of a pretty scary bear market, but we can and will get through it together.
Please call if you are feeling jittery or nervous, have questions, or just want to talk the situation through, we’d love to talk.