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Smart Actions in a Market Downturn
A market downturn, or bear market, can be scary for even the most seasoned investors. Investors can easily run through a rollercoaster of emotions--from the highest of highs to the lowest of lows—in just a week’s time. This cycle of uncertainty will cause many investors to reach out to their advisors to see what actions they should be taking to protect their future.
Many of those calls to advisors are going to be met with phrases like:
- “Stay the course.”
- “Don’t do anything.”
- “Relax, it will come back.”
While each of these three phrases may be correct from a theoretical standpoint, investors can get tired of hearing the same thing over and over.
So what should an advisor be telling you during these tough times?
MOVE TO THE G FUND!
I’m kidding, seriously, KIDDING! Please don’t make any rash decisions and definitely don’t move your TSP to the G fund (or 401k to cash) without considering the consequences.
The best course of action is to strategically assess your current situation and plan and act accordingly.
Here are some things that you can control and may want to consider right now:
Continue to contribute – I have received numerous emails from feds over the past month asking if I think they should quit contributing to the TSP. My answer has not and will not change: NO and NO! If anything you should look at increasing your TSP contributions during market downturns. Start with an Increase that spans over a period of 3-6 months and reassess along the way, but whatever you do, DO NOT stop contributing.
Rebalance – If your plan calls for a portfolio of 60% stocks and 40% bonds, it has probably shifted to closer to a 50/50 portfolio in the past month. This could be a good time to reallocate by selling some bonds and buying more stocks while the prices are low. This doesn’t guarantee that stocks won’t go lower, but, you are already purchasing at a dramatically cheaper price after a drop. Think of it this way: Would you rather shop at your favorite store while they are having a 25% off sale, or when everything is regular price?
Tax-loss harvest – When accounts are down it may be advantageous to sell positions at a loss in your taxable accounts. These losses can be harvested to reduce future income and offset capital gains. The IRS permits individuals to deduct $3,000 worth of losses from ordinary income each year and carry the rest forward into future years.
Refinance your mortgage – I have never seen mortgage rates this low. They change daily, but a couple of rates I have heard in the past week are 2.875% for a 30 year and 2.375% for a 15 year. These rates are CRAZY low! Refinancing could reduce your monthly payment, freeing up additional funds to be used or invested elsewhere.
Do a Roth conversion – Now may be a great time to do a Roth conversion. For the person that has an IRA previously worth $30,000 and now worth $20,000, now may be a good time to take advantage of a Roth conversion to position future growth to be income tax free.
Reduce distributions – If you are already retired and taking distributions from retirement accounts, ask yourself if you can afford to reduce them. Could you comfortably live on a little less for the next 6-12 months? Little things like this could give your investments time to recover from the market drop. And of course, the sooner your investments can recover from loss, the sooner they can begin to grow again.
Evaluate – What have you been doing to make these times easier financially? What have you been doing that may make them more difficult? Take a few minutes to evaluate your financial practices and adjust going forward to make things easier the next time we experience a market drop.
The stock market is something that we can’t control, but there are many other things we can do to put ourselves in a better position going forward. My goal is to put each one of my clients in the best position to succeed as we face the uncertain days ahead. If you are struggling with what to do in these unsettling times, schedule a call and lets discuss how we can work together.
Brad Bobb, CFP® is the owner of Bobb Financial Inc, and an expert in retirement planning for federal employees.