We at WealthPoint are still working diligently and have had many great conversations with clients. Each client has a well thought out, long term investment and financial plan that accounts for the ups and downs of the market. This plan informs us what to do in good times and in bad. I am putting together this list to help you think through other items that you can consider while the market is in bear market territory, especially when it comes to your personal finances and investment portfolio.
1. Rebalance back to your target stock to bond mix
We believe in not taking more risk than you have the ability, willingness, or need to take in your portfolio. As such, each client has a target investment plan, which outlines how much you should have in stocks and in bonds. Each asset class has appropriate guardrails in place that let us know when an area is out of line. With large US stocks, they are ~30% off their most recent highs. Some international holdings and small US stock holdings are 40% off their highs. This has driven many clients to be outside the effective guardrails in their portfolios, which has triggered many rebalancing discussions.
We have done a lot of rebalancing so far this year, and will continue to recommend to do so if markets remain volatile. Rebalancing forces us to buy low and sell high, which everyone learned about in school, but is incredibly hard to do in practice. That is why we are here.
2. Tax-loss harvest
For those with taxable accounts, we are opportunistically looking to tax-loss harvest. This is a way to make lemonade out of lemons and can lower your tax burden this year and potentially for years to come. To learn more, I found the following article from Fidelity particularly helpful on the subject: https://www.fidelity.com/viewpoints/personal-finance/tax-loss-harvesting.
3. Front load and/or increase your 401(k) contributions.
As the S&P is down 30% from its most recent highs, now is a good time to revisit your 401(k) contributions. Are you set to max out your 401(k) for the year? Great! Does your plan offer a “true-up” matching provision? If so, you can consider maxing out your 401(k) in the first half of the year. With a true-up provision, your employer at year-end makes good on the full promise of the employer’s match, regardless of when employees reached the annual contribution limit.
If you have the cash flow or the cash reserves, now would be a good time to consider maxing out your 401(k). If you’re not maxing it out, consider increasing your contribution so that you are buying more shares of stock at cheaper prices.
4. Make 2020 Roth and/or Back-door Roth IRA contributions
If you plan to make a 2020 Roth IRA contribution, now is a good time to put some money to work. The max contribution is $6,000 for 2020, or $7,000 if age 50 or older. There is also still time to make 2019 contributions if you haven’t already.
5. Consider a (Partial) Roth conversion
If your IRA account is now worth 30% less than it was a month ago, consider converting part of this account to Roth. You will have to pay income tax on the conversion this year, but you’ll now have Roth IRA money that will be able to grow tax-free for the coming decade(s). The stock market has always recovered and has always set a new all-time high, so now is a good time to consider this strategy. Your Roth IRA account is likely one of the last things you’ll spend in retirement, and if you don’t, it’s a great asset to continue to grow tax-free for your heirs.
6. Suspend your Required Minimum Distribution from your IRA for 2020
With the new stimulus bill that is set to be written into law (DISCLAIMER: IT IS NOT YET LAW), it states that you will not be penalized if you do not take a RMD for the year. If you do not need the money for living expenses, consider leaving it in your IRA to grow tax-deferred another year. If you use your IRA for charitable giving purposes via QCDs or Qualified Charitable Distributions, I would suggest still following this approach and giving to charity with IRA money.
7. Focus on your family budget and emergency cash reserves
Since most families are locked at home and eating out and travel are restricted, now is a great time to review your cash flow, budget, and cash reserves. We recommend keeping 3-6 months of cash on hand for dark times like now should anything happen to your income. Are you saving 15%+ of your income for retirement? If not, look for ways to accomplish this goal.
These are just a few things we’re talking to clients about. Not all will apply with your situation, so feel free to reach out to discuss how current events and volatility are impacting you and your family’s long-term retirement success. I don’t know how long this will last or how many people will ultimately be impacted. But I do know that Americans are incredibly resilient and that we’ll all get through this together.