As freefalls go, this one is bad. Certainly as bad as 1987 and perhaps, though I wasn’t around to witness it first hand, 1929. But during times like these, I’m often reminded of a conversation I had with Winslow Webber, who was a stockbroker in 1929 and in 1987.
Over lunch at the Union Club in the late 1980s, I asked Webber what advice he might have for investors given that he experienced not one, but two of the worst stock market crashes in the history of the U.S. His response: “These things go in cycles.”
That they do. The only trouble at the moment is that we don’t know when this cycle will end and the next one begins. So, what’s an investor to do?
Well, if you are already retired, I hope you took the advice of Harold Evensky and others of his ilk who often recommended that you have set aside at least three years of living expenses in cash. No need to put your money into risky assets that should not be at risk.
“It comes back to having mailbox income — money hitting the checking account without worrying about market value adjustments,” says Joe Lucey, president of Secured Retirement Advisors.
“If you have enough money hitting accounts through pensions, etc., and don’t have to take from your 401(k) that’s down, you’re in a better situation than someone forced to take from an account that’s down.”
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If you’re already retired, and you need money for living expenses, perhaps consider using your emergency fund, or the cash value in your life insurance policy, or your reverse mortgage or home equity line of credit if you have one.
Selling into a falling market could be, well, dangerous to your wealth at the moment.
So what do advisers dealing with real people have to say?
Assess your risk capacity. How much can you truly afford to lose without it putting a crimp on your desired lifestyle? “In a world full of chaos, a defined risk budget will help navigate these troubling waters,” says Jeffrey Cutter, CEO of Cutter Financial Group.
Resist. If you’re a retiree, Andrew Rafal, the president of Bayntree Wealth Advisors, recommends taking a deep breath and resisting the urge to make major changes to your portfolio. “Your plan probably includes bonds that are acting as a stabilizer in today’s volatile markets,” he says.
Though be mindful: Those same bonds, he says, will lose value as interest rates move back up. Given that, you might also consider dollar-cost averaging a portion of your money back to equities over the next six months to hedge against that risk.
For his part, Walter Pardo, the CEO of Wealth Financial Partners, recommends two strategies:
Roth IRA conversion. One is the qualified asset strategy, qualified assets being those in IRAs and 401(k) plans. This, he says, is the perfect time to do a Roth IRA conversion. That’s where you convert some or all of the money in your traditional IRA into a Roth IRA. You’d pay taxes on the distribution. But, Pardo says, “you’re paying taxes on assets that are worth less than they were in January but when they go up that will be tax-free growth.”
Harvest losses. The other strategy is for non-qualified assets. Here you would harvest losses. “Sell your assets — stocks, ETFs, bonds or mutual funds — now and realize the loss today in 2020 for next year’s taxes,” says Pardo. “It will help you offset capital gains dollar for dollar.”
According to the IRS, if your capital losses exceed your capital gains, the amount of the excess loss that you can claim to lower your income is the lesser of $3,000 ($1,500 if married filing separately) or your total net loss shown on line 21 of Schedule D (Form 1040 or 1040-SR). And, if your net capital loss is more than this limit, you can carry the loss forward to later years.
The other part of this strategy would have you invest in a similar investment or wait 30 days and buy it back, said Pardo.
It’s never too late – or too early – to plan and invest for the retirement you deserve. Get more information and a free trial subscription to TheStreet’s Retirement Daily to learn more about saving for and living in retirement. Got questions about money, retirement and/or investments? Email Robert.Powell@TheStreet.com.
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