In a volatile market like we’re dealing with right now, the usual rules do not always apply. However, some financial advice remains tried and true. If you’re struggling to understand the best way to manage your money during this difficult time, take a look at our five financial tips for an unsteady market.
- Stay Invested
If you do not have to pull your investments out of the market at this moment, then don’t. Stay invested. Historically, the economy rebounds, time and time again. Pulling out when your investments are low is a fear-based reaction that is understandable. It’s hard to watch your portfolio plummet on bad market days. However, even after the years-long great recession and housing collapse of 2008, the market rebounded higher than it had ever been pre-recession. While there may be some good reasons to sell an investment while it’s down (see tip #3), generally we advise our clients to stay the course and hold out for brighter days before cashing in.
- Diversify Your Portfolio
Most investment professionals agree that although it does not guarantee against loss, the most important principle in investing is diversifying your portfolio. People think that these days global stocks move together, but that’s not always the case. At the close of market on many days, you’ll see the NASDAQ is up, while the DOW is down or vice versa. That’s because they represent two different kinds of market indices, which can have dramatically different outcomes from day to day. In the US, you could buy stock in retail, technology, real estate, oil and gas and even bonds which many people do as they move closer to retirement. Invest in companies that don’t necessarily move in the same direction or play in the same field.
- Use Tax Planning Strategies to Your Advantage
It seems counter-intuitive, but you can actually use an investment loss to your advantage through a tax strategy called “tax loss harvesting.” The idea behind this strategy is that you take an investment going down in value and sell it at the same time you might sell an investment that’s gone up in value to offset your tax liability. You can also use this to offset some other income of yours – even W2 wages up to $3000. If you can’t use the entire loss, you can carry that over to future years, so there’s a lot of benefits to tax loss harvesting, but you will want to discuss it in depth with your financial advisor or stock broker.
- Evaluate your RMDs and Social Security benefits
Required Minimum Distributions are what you are required to take out of your retirement savings for people 72 and up (as of 2020). The recently passed CARES Act allows you to waive or suspend your RMD for one year, and it applies to IRAs, 401Ks, 403bs and other qualified retirement plans. If you suspend and leave RMD in your IRA, the value will just be there for next year’s distribution calculation. You might also consider investing that money into investments that are down and affordable at the moment. If you already received your distribution this year – whether some or all of it – you may be able to roll it back into an IRA and not be taxed on it.
Likewise, you may want to consider suspending or holding off on claiming Social Security benefits to increase the amount of your benefit long term. Now for many during unstable financial times, social security may be the income that you need, and taking it early may be the only option. But if you absolutely don’t have to take the benefit now, your overall benefit will likely be greater by holding off. Claiming your social security at 62 will decrease you and your spouse’s benefits for life. If you have jumped the gun and recently claimed benefits early, you have the option of a one-time reset. You can reverse your decision within in the first 12 months of claiming. The downside of this is you will have to repay any amount that has been paid out to you since you started receiving benefits. The other option would be to suspend your benefits until a later date. Maybe you get through these uncertain times and chose to suspend your benefits a few months down the road. This will allow your benefits to earn delayed retirement credits of 8% per year. You may then restart your benefits any time up until age 70.
- Consider converting your IRA’s to a ROTH
Converting your traditional IRA to a ROTH is not always a good idea – there are a lot of factors to consider. But if this year has caused you to have an unusually low income, then converting to a ROTH and paying the taxes now while you’re in a lower tax bracket may be beneficial in the long run. Even if your income has not decreased, but you’re concerned about the decrease in value of traditional IRAs, you may consider converting now at the lower value, and then never having to pay taxes on it again. This really is a case by case decision, as you will need to consider future income potential and various financial planning aspects. Keep in mind that you don’t have to convert right away. You can have a five-year plan or a 10-year plan to convert. Finally, make sure you’ve got the cash on hand to pay the tax.
We know that managing your finances during an uncertain time can be difficult and confusing. We hope these tips have helped, but if you feel like you need further advising or assistance from a professional, please feel free to contact us. We can sit down with you in person or meet via video conference and have a conversation about your concerns and goals as we make a plan to give you peace of mind.