During these turbulent times, it’s unclear how bad the Coronavirus, the economy or the market will get. It’s unnerving when the market and your portfolio suddenly drop, but that doesn’t mean it’s the right time to sell or take drastic action. Here are a few steps to help safeguard your portfolio and finances. By implementing these ideas, you may even come out ahead!
This is Robert Pagliarini. Thank you for joining me for the Pacifica Wealth Podcast.
Today’s message is one of control. I know it’s hard when the market and your portfolio drops so quickly. It’s unnerving, to say the least. Although this time we’re facing a health crisis in addition to an economic crisis, we’ve seen many other market declines much worse than this over the past 25 years. Of course, that doesn’t make it easier, simply saying, “It’s been worse before.” But, I want you to know that we’ve always come back stronger and the market has gone even higher.
What if you’re a buy and hold investor? You’ve heard that phrase before, right? Does it mean that you just sit back and do nothing? Let me tell you, the buy and hold strategy is one that I espouse. It’s a strategy that’s delivered excellent returns over longer periods of time. The principle reason for that is because it curbs selling, based upon emotions. The idea is that you simply buy and you hold. It doesn’t mean that you buy and sell when you get nervous, and then buy when you want to get back in later – that’s a strategy for failure.
I’ll often tell people that the best approach to become a millionaire as an investor is to start with a billion dollars, and then try to time the market. The whole point of buy and hold is that you have patience, and that you don’t sell because you’re fearful. But – and this is a big but – that doesn’t mean that you shouldn’t do anything. Here are a few strategies I’m recommending everyone do, especially, buy and hold investors:
#1 Make Sure You Sufficient Amount of Cash
What does that mean? Basically, make sure you have enough cash in bonds and liquid investments to ensure you have enough money for withdrawals if you’re in retirement and living on your portfolio and that you have enough for living expenses, if necessary. This is why I focus so much on comprehensive financial and retirement planning, because it’s only by knowing what the plan is that you can then create the correct asset allocation for your portfolio. This means you know how much you should have in growth assets, such as stocks, and also, what amount you should have invested in cash and bonds.
You want to make sure that if you do get laid off during this situation that we’re facing, or you get fired, or you’re not making enough income from your business, that you have enough cash for the next several months. If you do not, consider raising cash in your investment portfolio, or potentially securing a home equity line of credit that you can tap into in the worst case scenario. I remember recommending this to clients back in 2008 and 2009. This situation that we’re facing today is very different than the financial crisis we faced back then, but still, it could be weeks, it could be months, until we all get back to work and are making the level of income that we used to.
Make sure that you do some planning on your own that you can prepare. Make sure that you’ve got enough on the sidelines that you can live on if you need to.
#2 Have a Diversified Portfolio
This is crucial for a couple of reasons.
First, it decreases volatility. So, if the overall stock market is down 35%, a portfolio that has some amount of bonds will be down less than that, so that’s important. It helps people sleep at night, given the amount of volatility that we have.
The second reason that having a diversified portfolio is important is that it provides cash if you as an investor want to increase your allocation to stocks during a market drop. In other words, if you have cash or you have bonds, you can take some of those assets and sell them and buy stocks that have come down in price. This is a huge advantage that you have compared to someone who was 100% in stocks.
#3 Consider Tax Loss Harvesting
They say there’s no such thing as a free lunch, but tax loss harvesting comes pretty close.
If you haven’t already, I recommend you do tax loss harvesting, but what is it? Basically, it means that you’re selling investments with losses, in order for you to lock in those losses for tax purposes, but then immediately buying a similar investment. That way, you’re not out of the market. This is done so that when there are investment gains in the future, you can offset those gains with the locked in losses, in order to avoid capital gains taxes.
Again, the purpose of selling and doing this tax loss harvesting is not an attempt to time the market (meaning, trying to sell today and hope that you can buy in lower next week). No. It’s a tax strategy.
For example, imagine there’s a $1,000 loss that you lock in, and later, you have a $1200 gain. Now you’re paying tax on a $200 gain, instead of a $1200 gain.
There’s two important points when it comes to tax loss harvesting. The first is the investment that you buy cannot be a “substantially identical investment” to the investment you sold. Imagine that you have Amazon stock that you bought, now there’s a loss, so you sell it. You can’t then immediately buy more Amazon stock, because that is an identical investment. So, make sure that you’re not buying something that is substantially identical to the asset that you’re selling.
The second thing to consider when you’re doing tax loss harvesting: because this is a tax strategy, it only works in taxable accounts. In other words, don’t try to do this tax loss harvesting in your 401(k), your IRA, or other tax-deferred accounts.
#4 Rebalance Your Portfolio
What does that mean? For example, for the past few years, stocks have done better than bonds. We know this. As a result, your allocation to stocks most likely increased in your portfolio compared to bonds at the end of last year. The portfolio asset allocation may have started as 60% to stocks and 40% bonds and may have shifted to 70% stocks and 30% bonds. Why? Because stocks did much better than bonds in 2019. So, if you were to rebalance, that would require selling 10% of stocks and buying 10% in bonds so the portfolio goes back to 60% stocks and 40% bonds. However, now that stocks are doing worse than bonds, the opposite is true. Now that hypothetical allocation might be 50% to stocks and 50% to bonds. In order to get back to the target allocation, now we’d need to sell 10% bonds and buy 10% stocks.
Late last year, I had conversations with clients about rebalancing. Let me tell you, it was not an easy conversation. Here was my pitch to them essentially:
Let’s sell some of your stocks that have done so well and buy bonds that haven’t done as well.”
It’s typical to sell stocks – really anything – that is doing so well, only to then buy something that hasn’t done as well. However, if you think that conversation was difficult, it is just as difficult (probably more so) to now sell those “safe bonds” in order to buy those “risky stocks.” It is this discipline that separates good returns from great returns over time.
If you forget everything in this podcast, please do not forget this next sentence:
Rebalance your portfolio back to your target asset allocation now.
Do it. Trust me. You will thank me in the future.
#5 Update Your Financial or Retirement Plan
Have your advisor update your retirement plan. If you’ve been doing your own financial or retirement planning, consider hiring an hourly financial advisor to do a quick review. If you don’t know where to find one, the Garrett Financial Planning Network does hourly financial plans. You can hire an advisor for an hour or two to review where you are, what’s happened, and to see if you’re still on track. It’s easy to get distracted and scared by the headlines, but having an unbiased person review where you are may help you ease those concerns.
To conclude, listen, at the end of the day, nobody knows just how bad the Coronavirus, the economy, or the market will get. Anyone who says they do, is simply ignorant or they’re lying to you. There’s simply too many variables to predict where we go in the short-term. This means that we could have a quick rebound, or we could see more market losses. The bottom line: it’s a fool’s errand to try and guess what will happen in the short-term. Even if you are a buy and hold investor, that doesn’t mean you have to sit back and do nothing. Consider implementing the ideas I talked about earlier. Trust me. We will get through this. The question is, will your portfolio and finances come out better than ever? If you follow the tips above, they just might.
Thank you so much for listening. If you have any questions, please go to askdoctorrobert.com, submit those questions, I’m happy to try to answer them. Be safe, take care, and I’ll talk to you soon.