The uncertainty of how the coronavirus outbreak will affect the US and global economies triggered the S&P 500 to tumble more than 30 percent. In March, stocks experienced both the fastest and largest decline into a bear market ever, and the fastest and largest one-day advance in 87 years.
At this point, we have no way of knowing how long the economic effects of the coronavirus will last or when we will start to see some glimmers of getting back to normalcy economically. We have no control over that. So let’s focus on what you can control and how to best manage your portfolio during this unprecedented time.
Instead of worrying and feeling helpless:
1. Focus On Your Long-Term Goals
Day traders obsess over the day-to-day market volatility. But you’re not a trader; you’re an investor. And that means you must focus on the big picture.
Your asset allocation should reflect your goals and values, which coronavirus probably hasn’t changed.
In reality, most financial advisors have been preparing recession models for situations just like this. With so many good investing years, everyone predicted a pullback soon enough. Coronavirus just happened to be the catalyst.
A solid financial plan will be positioned to guard against these types of corrections. Your financial planner likely created diverse strategies to build your wealth over time. And these strategies take into account both the immediate and long-term market fluctuations. This is not to say that you haven’t suffered a loss on paper, but your holdings should be diversified so that the rest of your holdings did not decline to the level of the recent stock market loss.
By staying calm and following the plan, you won’t make any rash decisions you may regret later.
2. Do Not Try to Time the Market
Investors get scared when the market declines so drastically. That’s not unusual. But selling all of your stocks out of fear, almost guarantees that you will miss the full recovery when the market starts to turn. And it will turn. You just don’t know when.
These unpredictable markets — where people get the chance to buy low and hold until the market rebounds — are where the real gains happen.
If you’re close to retirement or are in retirement and need to withdraw from your portfolio for living expenses, this is the time you must rely on your fixed-income investments until the equity market recovers.
3. Take Advantage of the Wall Street Sale
Even new investors know you’re supposed to “buy low; sell high.” So take this market drop as a chance to stock up on investments while they’re at record lows. Think of it like shopping Wall Street on sale.
Investing in these deals now will set you up for success when the market makes its inevitable rebound.
So think about buying sectors that people are selling because of fear yet pay a high yield, such as those in energy and banking. Snatching up these at a discount makes a fantastic long-term opportunity for retirement investing.
4. Consider Tax-Loss Harvesting
Tax-loss harvesting is when you sell investments at a loss to lower your tax liability. This is the perfect time to sell off stocks you don’t like anymore but couldn’t sell before because they ran up in value and the capital gains tax would have been too high.
It is, however, important that at the same time you sell those losing investments, you purchase similar securities that give you the same or near-same exposure. The goal of tax-loss harvesting is to take the loss and switch to a new security that you like just as much or more during the current environment. You don’t want to tax-loss harvest just to get out of the market.
5. Plan for Changes Released in the CARES Act
The CARES Act that was passed in March to meet the needs of individuals affected economically by the coronavirus, included changes to retirement account distributions. Minimum distribution in 2020 from IRAs, 401(k)s, 403(b)s has been suspended for the year.
This creates planning opportunities to do Roth conversions or other tax-efficient moves. Strategies put in place this year can position you well for the future when it is very likely that the U.S. government will have to raise taxes to pay for the economic packages passed. Working with a financial planner to help you strategize is more important than ever.
Trust the Process and Your Financial Planner
Volatile markets are actually somewhat predictable; while there are no guarantees when it comes to investing, the market has always recovered. That’s why the best financial plans include safeguards to help you weather dips like these.
A coronavirus outbreak crashed the market this time, but it could just as easily be political unrest, supply-chain disruption, or one of a million different triggers the next time.
If you’re not close to retirement, you’ll want to ride out the coronavirus market correction and buy into the dip if you have available cash. Investors who sell during a market correction like this typically miss out on the subsequent recovery gains.
Remember, now’s not the time to abandon everything you’ve built for the future. If you and your financial planner have a strong strategy in place, your portfolio should be able to weather the storm.
Have questions about your financial roadmap? Get in touch with one of our Castle Wealth Management experts now!