The market has crashed. Like we always knew it would.
We didn’t know when. We didn’t know why. And we don’t know for how long.
But we knew it would crash again, which is why we plan for it.
So, now what?
Here are seven things you should do right now to improve your position during this crash:
1. Make Sure You Are Diversified
Being well-diversified means that you end up owning, in effect, the entire world of offerings. You own large cap. You own small cap. You own value. You own growth. You own international. And you own emerging markets.
If you own everything, two statements will always be true. One, you won’t make a killing off of any one investment. And, two, you won’t get killed by any one investment.
Instead, you will earn market-like returns and have market-like risk, adjusted only for the specific percentages you hold in each area.
If your portfolio is down a lot farther than the market, it is likely you are not diversified. Similarly, if your portfolio is down a lot less than the market, you may also not be diversified.
2. Consider Roth Conversions
There are two types of IRAs from a tax perspective: Traditional and Roth.
Most likely, when you roll a 401k over from your workplace to an IRA, you create a Traditional IRA, which has the benefits of tax deferral.
When markets are down, it may be worth considering converting your traditional IRA to a Roth IRA. Why? Well, if you follow the distribution rules, which are similar to Traditional IRAs, you never pay taxes. Instead, in the tax year that you make the conversion, you will add that entire balance to your taxable income and pay taxes on it at one time.
From that point on, the funds will grow without any tax liability. This is one of the only ways you can truly get tax-free money!
There are many challenges with this, so consult your tax advisor to understand the ramifications fully, but I do recommend considering a Roth conversion.
3. Check Your Retirement Contributions
Assuming your current expenses are covered, and you have no excess debt, you’ll likely want to maximize your retirement contributions, especially now that the markets are down.
It’s almost hard to believe how cheap your stock purchases will be with each paycheck compared to what they cost just a month ago!
4. Take Losses
When you have a loss on an investment, the IRS may subsidize part of that loss if you take it today.
These “realized” losses are netted against any capital gains before calculating the tax owed, reducing your capital gains tax paid. In addition, any unused realized losses are carried forward and used in future tax years.
This is especially good if you own some things that you’ve wanted to sell but didn’t want to take the tax hit.
Another way to reduce your taxes while maintaining your market exposure would be to take the loss and swap into other investments.
5. Rebalance Your Portfolio
Even if you’re happy with the portfolio you’ve constructed, the percentage owned by each investment may have drifted away from your original target.
If you originally had 80% in stocks and 20% in bonds, it’s possible that your stock allocation is now 70 – 75%.
This is an excellent opportunity to get your portfolio back in-line by selling some bonds which have done well in comparison to stocks (sell high) and buying some stocks to get your allocation back on target (buy low).
This, of course, assumes that you had the right allocation for your financial plan in the first place.
6. Refinance Your Mortgage and Consolidate Your Debt
This one may not apply to those who have refinanced in recent years as mortgage rates have yet to come down since the market crashed. At the time of writing this piece, they remain in the 3.5%-4% range.
But, if it’s been a while or even if you simply have other debt that makes sense to consolidate, and you have plenty of equity in your home, take a look at refinances and consolidating your debt.
7. Know Your Spending
You know I can’t resist an opportunity to push this message.
You should always know the price tag of your current lifestyle and all of your expected additional expense over at lease the next five years.
Knowing your spending in times like these gives you confidence that you can weather the storm. It also gives you a tool to help cut spending should you need to.
What Gets in the Way?
The media.
Many people will tell you to turn off the news in times like these, and I’m no different. However, I believe that you should turn off the market news at all times – good or bad.
The media makes its living by gaining eyeballs. The more people they get to watch, the more advertising they can sell.
If the best advice is to do nothing – as it is when you have a well-diversified portfolio, designed to help you get everything you want in life, given historical performance – they have to invent a justification for different advice.
They have to tell you to do something, and this most definitely gets in the way of your financial success.
Here’s the Good News
Crashes fade into history.
Since World War II, we’ve averaged a 14% decline in the S&P 500 every year and a 30% decline every seven years.
As I write this on March 20, 2020, the S&P 500 is down 32% from its peak.
This, so far, is an average crash.
But even at that, the index itself since World War II has gone from a reading of 12 to 2300, an increase of 190-fold.
And if that seems like too long of a period to consider, let’s look at a more recent time period.
If you had bought stocks on October 9, 2007 – the absolute peak before the last market crash – and reinvested dividends – as all savers do – you would have earned a 96% return.
That’s right, if you had bought on the absolute worst day before the last crash and held until the absolute worst day in this crash (so far), you would have almost doubled your money.
Not bad, right?
Do you have questions about how to protect yourself during this challenging time, or if you’re even making the right moves? I’m here to help. Click here to schedule your FREE 30-minute discovery call and let’s talk
Deliberate Money Moves Episode 010: Your Guide to Improving in the Market Crash
Managing your portfolio isn’t about beating the market or gaining a certain return. It’s about setting up your assets to take what the market gives us so we can achieve wants, needs, and goals. Now, amid a crash, that doesn’t seem too comforting, but with the right plan in place, you should be able to ride it out without too much of a hit. And even so, there are things you can do now, today, to help better your position. So, take a deep breath, find a quiet spot, and let’s shift our focus to gain some positive insights today.
Highlights from Episode #010:
- Have a long-term strategy, have a long-term financial plan, adjust it when needed, but stick to it when it’s working for you.
- Even if the marketing is good, don’t buy into the media hype.
Time-stamped Show Notes:
0:50 – It’s important to recognize what we’ve learned from previous crashes
2:06 – Why having a diversified portfolio is a good thing during a market crash
3:20 – Here’s how a Roth IRA could benefit you
4:18 – If possible max out your retirement contributions
4:49 – Joe discusses why you should take losses
6:10 – Now that the market has dropped make sure your portfolio is balanced
7:20 – How could refinancing your mortgage or consolidating debt help you?
8:27 – The most important thing you can do, not just during a market crash, is this
