Corrections and bear markets never come at the right time. Distressing world events materialize, and the stock market pullbacks just add stress and anxiety to the difficult times. In January, the world was fine; schools were in session, stocks were up, politics were divisive — it was business as usual. But a few weeks later our world was turned upside down and daily living has all but halted.
We all await the Covid-19 wave to arrive and pass, while praying for people to stay healthy and for all to have access to the medicines that will slow symptoms and prevent Covid-19’s transmission.
The phrase “cash is king” is suddenly back in fashion. That’s ironic, given that it all but disappeared the last few years with stocks doing well and cash paying close to nothing. Cash is great, sometimes, and now is one of those times.
However, should you move your accounts to cash? That is the question on everyone’s mind. Historically, we know that investors who cash out tend to under perform over time compared to markets, so how can market investors remain calm through the frantic daily swings? What steps can you take to feel more comfortable with your overall financial picture, while retaining the ability to rationally pivot your portfolio if needed and make smart decisions that can protect your income and grow your assets to fund your life goals?
I have spoken with many clients throughout this crisis. Sometimes I will finish one call with a person telling me to buy more and to buy now, while the follow-up call will be a plea to raise cash. Over the years I have learned a few things about handling tough markets.
- Have access to cash. Keep some in your house and have the rest accessible in a savings or checking account. Financial planners like myself recommend having somewhere between three to six months of cash or money market funds. If you’re retired, consider retaining more than six months to cushion against market events. It’s far easier to handle portfolio shocks when the amount you need for spending is easily accessible.
- Understand your investment timelines. If you’re 40, you have plenty of time until you need your retirement accounts. If you’re 92, your cash and income needs are likely higher and shorter. Review your portfolio now with your investment team for the income it provides, how it is allocated, and your timeline of need to spend.
- Tax loss harvesting. Investing losses are always painful, but one positive from it is the tax savings it could offer. Be proactive in volatile markets — there are many times when one security can be sold and another similar, but not equal, security can be bought for tax loss purposes. Often people wait until year’s end to review accounts, but tax losses can be harvested at any time.
- Have a plan. Financial plans model scenarios, and many use Monte Carlo simulations to duplicate typical and atypical market scenes to discover the rate of return you will need over your lifetime. Go back to the plan. Did expected outcomes change even after the market downturn? If not, great. If so, the plan will give you guidance on how to position the portfolio, while you discuss other options with your planner.
- Cut debt. Are you paying 7%, 10%, or more to fund past expenses? Reducing debt, even now, could be the best strategy to reduce spending so you can keep more of your portfolio intact until market recovery.
- Turn off the market news. It’s not exactly the best stock tip, but do you really need to hear the minute by minute updates? You are invested for the long term, correct? Otherwise that money should be kept in less volatile options. Check in daily, but do not hang on the interminable words of commentators who have not said anything new for the last 12 hours.
Experienced investors have lived through other periods of market turmoil. In the past they have always been rewarded by staying the course and not blowing up their investment plan. Put yourself in a position to let your stocks recover, and let the markets take care of themselves. You focus on protecting your family, something more valuable than any portfolio.
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About the Author: Rob Wrubel holds the Certified Financial Planning (CFP) designation, the Accredited Investment Fiduciary (AIF) designation from Fi360, and the Accredited Estate Planner (AEP) designation from the National Estate Planning Council. He is recognized also as a leading expert on planning for families with special needs members. Wrubel has written two books about finances and special needs families: Financial Freedom for Special Needs Families: 9 Building Blocks to Reduce Stress, Preserve Benefits, and Create a Fulfilling Future and Protect Your Family: Life Insurance Basics for Special Needs Planning.
Photo Credit: Jeremy Thompson
Tax loss harvesting, I need to work on that one.