I Love A Good Sale, Right Now the Stock Market Is On Sale!
As the media tells a story of shattered dreams and retirement losing value, I think it is important to keep a cool head and not make any rash decisions. Rather than panic and pull your money out of the market, it would be prudent to look at some of the planning opportunities that this market volatility might provide.
Here are a few opportunities to consider as we see this increased market volatility. I would ask that you please contact a Certified Financial Planner like myself and discuss which if any of these opportunities may be appropriate for you and your situation.
1. Tax Loss Harvesting - If you have investments that have lost money in a non-retirement account, you may be able to sell or exchange these investments at a loss to capture a tax advantage. This taxable loss can be carried forward saving you money on taxes on other investments that may have taxable gains.
2. Roth Conversions – If you have a Traditional IRA it may be worthwhile to convert your pre-tax account into a Roth IRA while the share price is smaller due to the market you will need to pay the taxes in retirement as you take the money out of your IRA. If you do this when the market is low you will be able to the same shares of your investment for a lesser tax liability. Traditional IRA owners should consider the tax ramifications, age and income restriction in regard to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.
3. Consider refinancing your mortgage – The Fed recently cut interest rates to stimulate the economy. I have spoken with some Lenders who told me rates are now getting into the 2% range. If your rate is higher than 4.5% you should consider talking to a mortgage officer to see if you would benefit from a decrease in your interest rate. It may be worthwhile to change to a 15-year loan and save speed up your mortgage payoff.
4. Buying Opportunity – When the stock market is down you have the ability to add money to the market and buy investments when they are on sale. The underlying value of many of these companies did not change when the market dropped. The Coronavirus will not change this very much. Keep in mind the difference between a sale and items that are on clearance due to them being discontinued. There are some industries that will forever be impacted by recent events.
I am fully aware of the emotional challenge it is to buy when there is blood in the street and people are at their highest level of mistrust with the stock market. I am also aware that when the markets are high it is easy to add money and jump on a bandwagon. These emotional tendencies are the opposite of what we should do. The best behavior is to have a goal-based financial plan and follow it.
5. Dollar-Cost averaging –The best and simplest opportunity we have in a volatile market is to continue to add money to the stock market in our retirement plans as the market moves. The Principle of Dollar-Cost averaging encourages you to add to your accounts regardless of prices in the stock market. As you continue to add money every paycheck you will buy some shares at a higher level and you will buy other shares at a lower level as the market drops. Because you can buy more shares per dollar when the market is low this will result in a lower average price for your investments.
The best part about Dollar-cost averaging is it does not require any special account features or investment knowledge. You can accomplish this with your payroll contributions to your 401(k).
For people that are about to retire are in the early years of retirement. I would encourage you to sit down with a Certified Financial Planner to see how well your situation might endure if this situation continues to 2008 like levels. It is important that you dialog with your financial planner about their cash needs over the next few years. Many of my clients set cash aside before the market dropped. This is going to enable them to continue with their goals and aspirations regardless of what the market is doing. This type of planning should happen before we find the economy in a crisis situation.
Be wary of strategies that attempt to be out of the market and get in during the good times. There is no secret sauce that allows you to miss the bad times. You will likely end up selling when the markets are low and getting back in after the markets have started to recover.
Annuities are another strategy than some advisors employ to avoid downside risks. If your advisor is selling you an annuity please make sure you understand the benefits risks and costs associated with the products.
Stay calm, don’t panic and make sure you have a plan in place. Once you have a plan in place – Stick with the plan!
Joe Johnson CFP®
Please consult your tax professional for any tax specific information for your situation.
Joe Johnson is a CERTIFIED FINANCIAL PLANNER® Professional and owner of Sage Hills Financial in East Wenatchee. For more information please go to www.sagehillsfinancial.com
Securities and Financial Planning services offered through LPL Financial, a registered Investment advisor. Member FINRA/SIPC.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
Stock investing involves risk including loss of principal.
Traditional IRA owners should consider the tax ramifications, age and income restriction in regard to executing a conversion from a Traditional IRA to a Roth IRA. The Converted amount is generally subject to income taxation.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax-free as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
Dollar-cost averaging involves continuous investing in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.