What Nervous Investors Should Do Now

It’s hard to see the stock market and investment portfolios drop so quickly. It is unnerving, to say the least. Although this time we are also facing a health crisis, we’ve seen many other market declines much worse than this over the past 25 years. It doesn’t make it any easier, but with each past drop, we’ve come back stronger and gone even higher.

You’ve heard of the investment approach of “buy and hold,” right? That’s a proven strategy that has delivered excellent returns over longer periods of time because it curbs selling based on emotion. However, you have more control than you think. I recently recorded a retirement financial podcast where I discussed several financial strategies nervous investors can implement right now. And yes, even die-hard buy and hold investors should consider the following…

1. Insure you have sufficient cash. Make sure you have enough cash/bonds and liquid investments for withdrawals/living expenses if needed. This is why comprehensive financial planning is so important. It should inform you as to how much of your portfolio should be invested in more volatile and higher growth assets such as stocks and what amount should be invested in cash and bonds. Do you have enough cash if you get laid off or cannot work for several months? If not, consider raising cash or securing home equity lines of credit that you can tap into in a worst-case scenario.

1. Have a diversified portfolio. This is also crucial for a couple of reasons. First, it decreases volatility. If the overall stock market is down 35%, a portfolio with some amount of bonds will be down less than this. Two, it also provides cash if an investor wants to increase his/her stock allocation during a market drop. In other words, investors with cash and bonds can take some of those assets and buy stocks that have come down in price.
2. Conduct tax-loss harvesting. They say there is 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”, which is selling investments with losses to lock in the loss for tax purposes and immediately buying a similar investment. This is done so that when there are investment gains, you can offset the gains with the locked-in losses to avoid capital gains taxes. The purpose of selling is not to attempt to time the market — sell today and hope to buy lower next week. It is a tax strategy. For example, if there is a $1,000 loss we lock-in, and later if you have a $1,200 gain, you can offset the gain with the loss (so you’re paying tax on a $200 gain instead of a $1,200 gain). Two important points. First, the investment you buy cannot be a “substantially identical investment” to the investment you sold. Two, this strategy only works in taxable accounts.
3. Rebalance your portfolio. What does it mean to “rebalance” your portfolio? For example, over the past few years, stocks have done better than bonds. As a result, your allocation to stocks most likely increased in your portfolio compared to bonds. A portfolio asset allocation that may have started as 60% to stocks and 40% to bonds may have changed to 70% in stocks and 30% in bonds just because stock returns were so much higher than bonds in 2019. Rebalancing would have required 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. So now that hypothetical allocation may be 50% to stocks and 50% to bonds. In order to get back to the target allocation, we’d need to sell 10% bonds and buy 10% stocks. Late last year I had conversations with clients about rebalancing and it was not easy. Here was my pitch then. Let’s sell some of your stocks that have done so well and buy bonds that haven’t done as well. It’s difficult to sell stocks (or anything) that is doing so well only to buy something that isn’t. However, if you think that conversation was difficult, it is just as difficult (more so, actually) to now sell the “safe” bonds in order to buy stocks. However, it is this discipline that separates good returns from great returns over time. Rebalance your portfolio back to your target asset allocation.
4. Update your financial/retirement plan. Have your advisor update your retirement plan. It’s easy to get distracted and scared by the headlines, but having an unbiased person review where you are may help ease your concerns.

At the end of the day, nobody knows how bad the coronavirus, economy, or market will get. Anyone who says they do is ignorant or lying. There are simply too many variables to be able to predict where we go in the short-term. This means we could have a quick rebound or we see more market losses. Bottom line, it’s a fool’s errand to try to guess what’s going to happen in the short term.

Even if you are a buy and hold investor, this doesn’t mean you have to sit back and do nothing. Consider implementing the ideas above. We will get through this. The question is, will your portfolio and finances come out better than before?

This article was written by Robert Pagliarini from Forbes and was legally licensed by AdvisorStream through the NewsCred publisher network.