By: Phil Kernen
Over the last several months, the world turned upside down. Information and data are overwhelming and feed our feeling of losing control. War, inflation, and general uncertainty can lead to poor choices, so focus on making fewer but better decisions. Depending on your financial situation, the following are four smart decisions to make right now.
Rebalance your portfolio – If you haven’t touched your portfolio all year, market declines have likely shifted your asset allocation away from your targets. Rebalancing is the disciplined process of periodically selling the outperforming assets and buying the underperforming assets, moving your asset allocations back towards your targets.
Imagine your portfolio is allocated 60% to stocks and 40% to bonds. If stocks return -20% and bonds return -5%, your asset allocation is now 55% stocks and 45% bonds. You would sell 5% of your bonds and use the proceeds to buy more stocks, returning your allocation to 60/40. Buying stocks in a down -20% market is challenging, but it helps to remember you are bringing your asset allocation back to your target. Better yet, you are buying stocks at a discount in the process.
Consider a Roth conversion – a Roth conversion transfers funds from a pre-tax retirement account, like a traditional IRA, to a Roth IRA. You will have to pay taxes on the conversion, but Roth IRAs have several advantages. One, when you pull those funds from your Roth IRA later in retirement, you can do so tax-free. Two, if your heirs inherit a Roth IRA, they too can pull the funds out tax-free.
The benefit of a conversion when market values are down is the ability to convert more. Say you were thinking of converting $50,000 last December. You can now convert those same assets at a lower value, pay fewer taxes on the transaction, and let those funds grow in a tax-free account.
Keep funding your retirement plans – Market downturns benefit employees with access to retirement savings accounts. Every dollar you invest during the market downturn allows you to take advantage of lower market values. Resist the temptation to approach market uncertainty by reducing or eliminating contributions. Retirement funds have a long-term investment horizon. Continue your contributions and reap the benefits as equity values eventually increase.
Revisit your financial goals – This is the most impactful of this list and will provide the greatest sense of control in an uncertain world. If you work with a financial advisor, ask them to update your plan using new market values. Talk about whether any of your goals have, or should, change. Discuss any adjustments in your spending or investing patterns that may be warranted. If you need help, find a trusted advisor who can guide you. Families with a financial plan coming into 2022 still encountered the same market declines as everyone else, but that plan allowed them to focus on priorities and quickly regain control over their future.