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Coronavirus: What should you do about your investment portfolio? (Hint: Don't Panic)

Coronavirus: What should you do about your investment portfolio?

(Hint: Don’t Panic)

 We are all struggling with the uncertainty regarding the Coronavirus Pandemic impact on our lives and our investment portfolio. Many people struggle to separate their emotions from investing. Reacting to current market conditions may lead to making poor investment decisions. The chart below “Many Investors Follow Their Emotions” shows the range of investment emotions we experience during stock market peaks and drops like the recent quarter.

 

We know that Rebalancing your portfolio is important. Rebalancing means adjusting your portfolio periodically to keep it in line with your chosen asset allocation and risk level—in other words, maintaining the relative percentages of stocks, bonds, cash and other investments that you originally selected.  “It may be challenging to sell investments that have done well and add to holdings that haven’t performed as well, but developing and maintaining the right long-term asset mix is by far the most important set of decisions an investor will ever make. Rebalancing forces us to do what we know we’re supposed to do, which is “buy low, sell high”.  (Charles Schwab Resource Center, 3/10/2020.)” 

A New York Times investment writer, James B Stewart, recently turned to Frank Murtha, a managing partner of the consulting firm Market Pysch and an expert in behavioral finance, to explain why it is hard to rebalance in a down market. “Stocks are one of the few assets that psychologically become harder to buy as they become cheaper. Every decision to buy is met with negative reinforcement,” Mr. Murtha said. Even he missed the great buying opportunity in March 2009. “I was too scared,” he said.

The writer explained he didn’t commit what Mr. Murtha considers the most serious error, which is to sell into a steep decline. “That’s where people really get hurt,” he said. “Once you’re out, the emotional leverage works against you. Either the market drops further, which confirms your fear. Or it goes up, and you don’t want to buy after you just sold. Then it gets further and further away from you. People don’t realize how hard it is to get back in.” (New York Times, 3/27/2020)

What positive action do we recommend?  The following strategies are ways you can benefit from the current Bear Market:

1.Rebalance your portfolio to maintain your target equity allocation prior to the market recovering. At a minimum, do not sell any equities.

2. Tax loss harvesting. This is an ideal time to sell equities in taxable accounts to recognize capital losses. Simultaneously, replace these equities with other equity funds. You are maintaining the same equity allocation, but realize capital losses. You can use up to $3,000 a year in capital losses against your ordinary income on your tax return, and carry forward the rest for use in future years.

3. Roth Conversion. It is preferable to convert all or some of your IRA into a Roth IRA, when the balance of your IRA is lower. You pay taxes on the amount of the IRA you convert, but no 10% penalty. Roth IRAs grow tax deferred, like Traditional IRAs, but you are never taxed on qualified withdrawals in retirement.

Please feel free to schedule a call at my website www.primewealth.com if you would like to discuss this further or reevaluate the appropriateness of your portfolio.