You notice over your morning coffee a stern warning emanating from your television as the very serious business reporter notes the Dow opening down one percent. What do you do? If you screamed, “Sell!” or “Panic!” perhaps you should take the advice of some of the world’s savviest investors and turn away from the stock ticker for the rest of the day. You may be envisioning dollar signs flying out of your wallet and you want to get on the phone and sell. You may even see an opportunity to buy. However, history tells us that sticking to your investment plan is always the smartest course of action and that market timing or panic selling will rarely if ever outpace simply letting the periodic "Bear " market to run its course.
Billionaire and real estate magnate Warren Buffet told CNBC in 2016 that buying or selling in a rush may not be the best strategy. “If [worried investors are] trying to buy and sell stocks, and worry when they go down a little bit … and think they should maybe sell them when they go up, they're not going to have very good results." Such a panic move could unbalance your portfolio where you are either taking on more or less risk than you should.
1. Keep a Portfolio That Reflects Your Comfort Level.
Having a risk appropriate portfolio can help to balance risk and return. We use a tool called "Riskalyze" to help clients understand the "likely" low and high ranges of their portfolio. This will be effective 95% of the time but doesn't really help when markets take deeper dives. During these inevitable and regular "Bear" events, be strategic! When the dust settles, and it will, then you can move your more conservative positions and add to stocks that are down in price. It’s not a panic buy; it’s a strategic move that fits your original investment plan by taking your portfolio back to the ratio of stocks to other assets.
2. Do NOT Panic Sell!
Typically panic selling is triggered by events that may lower the confidence level of investors causing them to sell and when this occurs on such a wide scale sharp declines in pricing tend to occur. Selling in a rush to get out of a down market could have long-term implications and often times cause you to miss out on some big gains when the market corrects. Don't make that panic move! You will more than likely be wrong and if we could do this correctly with regularity, we would all be doing it!
3. Consider Taking Advantage of Tax Laws
Many of us suggest a strategy to create tax losses to offset capital gains by selling an investment. If your gains are less than your losses, you can claim those losses on your tax return. You can carry over losses greater than the amount you can claim on your annual return to another tax year. This strategy is referred to as tax-loss harvesting.
Also for many of you, this will be an excellent opportunity to do a Roth Conversion! What better time is there to move as much as you can from your traditional or rollover IRA to a Roth IRA and allow it to heal and grow larger in a tax free vehicle? Every situation is different, so check with your CFP® to run the numbers specifically for you. In 2020, paying a little taxes now, will likley be better than what the tax rates may be down the road when you really need the funds!
4. Protect Your Nest Egg.
If you’re really worried about things like a college or retirement fund during a downturn in the market there are a few steps you can take to protect these funds.
I know, you hate it when a guy like me says "think long term". It's not really your first thought when you watch your portfolios decline in value. When you start to see headlines of the stock market declining it can be easy to go into panic mode and wait to watch values decline in real-time. However, when you sell investments in a downturn you are essentially locking in your losses. When the market eventually stabilizes you'll likely be left chasing much higher prices. It's always a good idea to keep your long-term goals in mind before making any decisions in a downturn and consulting with an experienced financial advisor before making any moves.
Buffet advised taking a look at the earnings sheet to determine whether you have made a good investment, not the market. You can’t judge your investment strategy all of a sudden; you have to look long-term.
Lastly lean on your CFP® to help you with putting things in perspective. When you realize that there are not longer term periods where markets are negative, you can feel more secure that history will help keep you on the correct path.
Roy Larsen is a Certified Financial Planner™ practitioner and Fee Only Wealth Manager who resides outside of Atlanta, Georgia.
Roy's Financial Blog contains articles on the multiple and complex issues of living successfully in Retirement.