This is a guest post from Greg, let me know if you would like to guest post on RFI
With over 25 years of experience, Greg is an uber-passionate money coach, author, speaker, securities litigation expert witness, financial planner, and most importantly a steward of wealth who is dedicated to calming your nerves and teaching you how to retire with ultimate “money confidence!”
He holds his CFP®, CLU®, AIF®, and AAMS® designations, and is also a CEFEX certified fiduciary financial planner. When he’s not helping people squeeze every last dime from their retirement, you’ll find him mountain biking, running, walking the dogs or spending quality time with his wife and twin boys.
I really want to emphasize that I’m not downplaying what’s going on in society as well as the markets, because there’s no way you can. We are clearly in a very serious situation.
There’s no way that you can downplay the fact that many people are dying from this disease, and that society will change forever in on way or another in the wake of the coronavirus.
My job is—and has been for 25+ years now—to focus on you and your financial planning. So when I see an opportunity I’m going to take it, and this opportunity is basically to help you learn the things that you should be doing NOW!
The fear and the anxiety that the average person has is normal. Times like these when you look on the screen and you see the S&P down 10%, and then the next day it’s up 5%, can be very frustrating and I completely understand that.
The most important thing I can impart upon you right now is to RELAX! I will also tell you these are things that we plan for every day with our clients and it’s built into their financial plan. Hopefully it’s already built into your financial plan as well!
In order to find out where we’re going from here, it is critical to see how the markets have responded immediately following a pandemic.
There have been about five of these major epidemics going back to 2000. Below are the 12 month returns immediately following a pandemic.
Bird Flu: 18%
Swine flu: 35%
As you can see, in the following 12 months of deadly diseases, the markets have come ROARING back.
My point is we’ve seen these, we’ve dealt with them, we’ve survived, we’ve thrived and we will do the same with this one. There’s not a doubt in my mind.
But the reality is we’re not wired to be successful investors. An annual study from DALBAR proves just that:
As you can see, the average investor underperforms the index by around 3%.
Why is that? Because of Coronavirus, you see blood in the streets and red on the news screen when you’re watching TV, and you feel like you have to do something.
The reality is it’s better to buy the index and DO NOTHING!
There are 7 rock-solid, time-tested strategies that we are implementing for our clients right now and it will help them make money on the other side of this Coronavirus craziness . . . and every other future market meltdown.
#1. TAX-LOSS HARVESTING
You may be asking yourself, what is tax-loss harvesting?
Let’s just say you bought SPY ETF at 10 bucks a share and now it’s down to seven bucks a share. So you’ve got a $3.00 per share loss that you can actually lock in and write off on your taxes including up to about $3,000.00 of ordinary income.
So, you would sell SPY ETF, then buy something similar (not identical) and then you would wait out the wash-sale rule, which is 30 days. After that passes, you sell the replacement security and repurchase the original one.
This tax-loss is going to help offset future tax gains and some ordinary income.
If you don’t have a strategy for rebalancing there’s a real problem because times like these are when you want to be buying stocks.
I personally don’t believe that rebalancing once a year is good enough, and that’s what most people — and financial advisors-do unfortunately.
The problem is we could have started the year at 25,000 on the Dow. In a matter of weeks, we could have went all the way to 30,000.00 on the Dow. During that time we had opportunities to sell stocks and buy bonds.
Guess what’s doing well now, your bond investments! Guess what’s not doing well, your stock investments! And in times like these last few weeks when the markets are off 30%, you have opportunities to buy stocks by selling bonds.
Rebalancing will force you to buy low and to sell high, which is what every investor wants to do!
#3. ROTH CONVERSIONS
Now is the best time to convert an IRA to a ROTH IRA. You’re going to have to work with your tax advisor and financial advisor in order to determine the right amount, but your future taxpayer self will thank you, why?
Because when we do IRA to ROTH IRA conversions what we’re doing is we’re pulling shares. So we may have that same SPY ETF, and we could have a month ago, converted a certain dollar amount at $10.00 a share. Now we can convert a whole bunch more at $7.00 per share!
So when that ETF goes back up to 10 we’re gonna have a nice little gain on it in the ROTH IRA only paying taxes on it at a depressed price. So, we get more shares into the ROTH IRA when markets are depressed.
Moving money into the Roth IRA is going to lower your required minimum distributions. If you look at the numbers when you’re 72, 75, or even 82, those required distributions on a large IRA can be massive and can throw you into higher tax brackets.
ROTH IRA conversions also reduce the widow tax because there’s no tax on the ROTH IRA. When you’re married and filing jointly, you’re going to get a more preferential tax rate than when you’re single.
Now, when I die my wife is going to be forced into a single filer bracket. When she gets into that single filer bracket she’s gonna pay more taxes on those IRA distributions and that’s a problem.
If you’re going to hold the shares anyways you might as well move them over while they’re lower in price.
#4. INCREASE YOUR EQUITY ALLOCATION
If you look at what the S&P has done after declines of 10%, the markets have rebounded sharply in periods since. 11.3% one year, 10.2% over three years and 9.6% over five years.
To give you some frame of reference our projections on the U.S. and the international equity markets are around 7% per year.
If you look at the return when we’ve had a serious bear market catastrophe like this, then it is substantially higher.
Keep in mind, increasing your equity allocation when we’re in a bear market is a great opportunity because when we do eventually bounce back, you’re going to have more shares of equity to appreciate that you bought now at lower prices.
#5. UPDATE YOUR RETIREMENT PLAN
I don’t want to sound like a broken record, but this is critical. In the planning work that we do we will have clients where they’ll have a certain portfolio. The market may be rolling as we’ve had and we will look at this to stress test your plan.
Essentially, what percentage of allocation, stock to bonds, makes the most sense for you now?
We’ll look at this and we will say, “by the way, John and Jane, you’re at 65% stocks. The market’s done so well the last three years you can accomplish all your goals if we drop you down to 55% stock, and you can have less risk”.
Conversely, in times like these we’ll say “Hey, you are at a 65% allocation. The market’s dropped so much it makes a lotta sense to go up to 75% stock”.
This is part of that “stay the course” with the plan. You’ll ask, “Do I have a better retirement planning result if I increase my equity allocation, if I decrease my equity allocation, or if I stay the same?” These are things that you need to know to make great financial decisions.
#6. STRUCTURED NOTES
How do structured notes work? Well, it’s not easy to make sense of them, in fact they’re fairly complex. To make things more difficult there are an infinite number of ways structured notes can be “structured.”
Structured notes are basically a bond that has some equity-like characteristics. I did one last year and as you can see from the chart, the market was down 13% from where I had bought this note. The actual note is down 3% Now, what would you rather be, down 13% or down 3%?
We still expect that full 7% annualized (or so) return through the maturity of this note.
You can see when we structure these notes we can give you some downside protection, we can give you some upside return, and we can give you what will basically give you a better chance of delivering those numbers projected in your retirement plan.
#7. SAVERS INVEST MORE
If you’re a saver, again, invest more now! This is a great opportunity!
Right now the stock market is discounted more than 30%. If you’re investing in a 401K you should up your allocation or up your contributions because now is the time to take advantage of cheap prices.
You want to build up the number of shares that you own, forget about what they’re worth today. They’ll be back up in value eventually (but we don’t know when) and you’ll have great returns in the future, but focus on the number of shares that you own.
These are my seven time tested, rock-solid strategies. You notice I didn’t say go buy an annuity or an insurance policy, or to time the market because that doesn’t work! These are tax and planning strategies that you can actually implement with your advisor, with us, on your own, that actually work!
While these are crazy . . . scary times, we will get through this together!
You have three decisions to make today. You can sell now, locking in these horrible losses and hoping to buy back in lower (which is the definition of timing the market). You can stay the course, and survive with blinders on (which is better than selling out). Finally you can use some or all of these 7 strategies to actually thrive on the other side of this catastrophe!
The choice is yours, but I recommend at a minimum staying the course, and at best do some Roth conversions, rebalance your portfolio, increase your investments. Time will tell when we bounce back, but when we do you’ll be much better off for acting on these things now.