2020 has been nothing short of astonishing in so many ways. A worldwide pandemic followed by civil unrest and now an impending presidential election to top it all off. The S&P 500 dropped 33% from February 19th to March 23rd – a very scary decline amidst a crisis none of us have seen in our lifetimes. How did you respond to the crisis? In our experience, one of two ways – you either sold out at the bottom of the market or you hung on for dear life. And, frankly either answer is understandable. For none of us knew where the market was or is now headed. But, is the Covid crisis really any different than any other crisis that has come along in our history? Time will tell, but, it is sure looking like it’s not all that different. The market drops like a rock due to frightening uncertainty and then gradually recovers. In this case, the market has fully recovered plus some. Can the recovery be believed or are there more surprises ahead?
Frankly, there will always be surprises. Afterall, the world is complex and unpredictable. It always has been and always will be. Nothing has ever been easy and nothing follows a straight line. But we are here at this moment in time reevaluating most everything as a result of going through Covid. As a result, we thought we would take the two scenarios presented above and provide some action tips for how to think about your situation.
Scenario #1 – You sold out at the bottom of the market
- Why? Was it justified? Or, did your emotions get the best of you? Before doing anything it would help to level up with yourself. If selling was justified, ok. If not, recognize your mistake and figure out how to avoid making the same mistake in the future. If it is time to hire an advisor who can help you avoid emotional selling, do so. Be sure to evaluate your risk tolerance then create a plan for moving forward.
- Did selling your positions trigger any tax consequences in non-retirement accounts? If so, make sure the funds are set aside to pay the tax. Last thing you want to do now is have to sell something at a further loss if the market is going haywire around tax time. This might also be a good time to brush up on how capital gains and dividends are taxed so that you can create a more tax efficient portfolio in the future.
- Reevaluate your financial plan. By this we mean look at how all aspects interact with one another. Will you have enough money to last for your lifetime or are things looking a little thin? Is your plan reality suggesting a certain investment allocation. Many times it is obvious and many times how you divvy up your investment dollars is a preference, meaning you have enough to see you through, and can take on whatever level of risk you are comfortable with. Know where you are on that scale use that as the first step to understanding how you should be allocated.
- Create a new investment plan now that you have a clean slate. And once you have created that new tax efficient plan, consider dollar-cost-averaging back into the market. Meaning take the cash you have and invest in over a period of time so that you manage timing risk.
- If you are still on the fence, consider using high quality, shorter term individual bonds for a bit more yield than the cash you are sitting on now. As the bonds come due, you can determine whether you are ready to start easing back into stocks.
Scenario #2 – You hung on for dear life, your portfolio recovered, but, you have concerns about the risks that lie ahead
- First, give yourself a little pat on the back for staying the course during a difficult period of time. Resisting the urge to sell is really hard and you are to be congratulated. Treat yourself to something nice for you and/or your family.
- This is a great time to re-evaluate the level of risk you are taking with your investments. Is the risk level necessary to achieve your financial goals. Or, are you taking on more risk than you really need to. Maybe you would like to lower the volatility so you don’t experience such highs and lows. In either case use this period to rebalance your portfolio. Rebalancing should be a regular part of maintaining your investment plan even in normal circumstances.
- Even though your portfolio has recovered, do you have any dogs that it might be time sell. Evaluate them and if they are in a non-retirement account you may be able to sell the fund or stock, capture the loss, and use it to offset any gains now and in the future.
- Update your financial plan and goals for the future and make sure all is aligned with your investment mix.
- If changes now need to be made, be sure to know if there is any impact on your tax return.
Did you ever hear the saying “Never waste a good crisis”? Well that quote is true this time around in a lot of ways including your financial and investment plan. You have undoubtedly learned a few things over the past six months. Don’t let all the uncertainty or mistakes paralyze you. The key is to just move forward. We are here to help if you need us.