There’s so much that is out of our control at any given moment and what we are living through today is no exception. Investors and consumers alike are worried about a number of things: gas prices, supply chain issues, inflation, the war in Ukraine, rising interest rates, stocks falling, bonds falling – it’s a long list.
Investors are losing money right now, some more than others. Diversification has helped to bear the brunt of this pullback, but it still doesn’t feel great. Feeling out of control when it comes to your finances can be uncomfortable, to say the least, but taking unnecessary action during a pullback can be a costly mistake.
Doing nothing during a downturn isn’t the most exciting advice, but it can work for most and although buy and hold isn’t a perfect strategy (there’s no such thing), it often yields better results than trying to time your way in and out of the market based on its current condition.
Every type of market can offer us something we can do to improve our overall financial picture, but whether or not we should take action depends entirely on our own situation.
Buy Now
It’s always a good time to invest and data has shown even after market highs there are still gains to be had.
Fig. 1. Why a Stock Peak Isn’t a Cliff, 11/2021. Graph from Dimensional Fund Advisors.
The last three years were a great example of this. We essentially went up and to the right in an almost linear fashion. It’s been great for account balances and portfolio performance, but this is not how markets work long-term, eventually they need a breather.
If you’ve got cash on the sidelines, now is as good of a time as any to put that money to work. Stocks and bonds are both on sale, this rarely happens at the same time.
If you are dollar cost averaging and socking away money every paycheck, keep doing that. Savers have been consistently buying in at new highs over the last three years or so. This is a chance to buy in at lower prices. Remember that the focus is buying more shares. Eventually the price of those shares will go up. Might not be today or tomorrow, but this is a long-term play.
Rebalance Your Accounts
If you have a rules-based system in place, you’ve probably already rebalanced your portfolio given how markets have been behaving.
While rebalancing can be more difficult in general when both stocks and bonds are down, it can present several opportunities that don’t exist in bull markets.
One example of how this can work in practice is if you’re holding a concentrated position in a taxable account. If you’ve been hesitant to diversify and sell out of the position because of the tax implications, now might be a good time to do so. Even if you’re still sitting on a gain, it’s probably smaller than it was five months ago.
While the long-term goal of investing is to make money, not to lose money, there are some circumstances where selling now may make sense.
Consider a Roth Conversion
There are several reasons not to convert pre-tax dollars into Roth dollars. Maybe you’re a saver in the highest marginal tax bracket and you don’t want to foot the tax bill on a conversion. Maybe you’ve got substantial non-deductible IRA assets and you want to avoid the pro-rata rule. Whatever the case may be, it might be worth considering looking at your IRA assets to see if this makes sense for you.
The tax owed on a Roth conversion is based on the value of your account the day you convert it. When the account balance is lower you pay less tax. Doing a Roth conversion during a market correction could help you end up with larger account with less tax paid overall. If you’re working with an advisor and/or a CPA, you’ll want to consult with them first before doing any Roth conversions.
Advice for Spenders
A lot of advice given during market downturns is aimed at savers, not spenders. So, what are retirees to do in times like these?
Hopefully if you are reading this blog that means you’re a TAAG client and you have already factored market drawdowns into your financial plan. If you’re taking withdrawals from your portfolio, we are monitoring the performance of each of your positions to ensure we are making the optimal choice when generating cash for your withdrawals.
If you’re just a friendly reader, the best advice I can give you is not to panic. Market corrections are inevitable and something you should be prepared for as an investor. If there was no risk involved in investing there would be no reward. Having a plan in place doesn’t prevent losses in itself but can help diversify some of that risk away while you wait for the eventual recovery.
Making changes to your investment strategy in the midst of a correction may not be in the best interest of your portfolio over the long term but depending on your situation there may be some things you can do to take advantage of today’s market conditions.
As always, if you have questions about your portfolio or financial plan please reach out to your TAAG advisor.