By: John P. Napolitano, CFP®, CPA, PFS, MST
No one enjoys headlines that make you shiver, except for the broadcast networks themselves. Recent market declines are based on the fear of the unknown, which translates to everyone’s own interpretation of the financial consequences of the economic slowdown due to the coronavirus. Thinking we may be in store for a prolonged decline may be overblown, but they feel pretty darn real in the short term as you are watching the values of your portfolio decline.
In every disaster, real or imagined, there are two sides to the equation. There are the perma-doomsdayers who will tout a falling sky and the realists that understand volatility and what drives price and value in risk based investing. If you are a doomsayer, save yourself some time and don’t bother reading the rest of this article. But if you have any realist in you, which includes faith in capitalism and that hard working people are more likely than not going to succeed, read on for a few minutes as I share ideas to take advantage of market weakness.
Take advantage of a Roth IRA conversion. Roth conversions make a lot of sense for a lot of people. Without the space to get into the details of why a Roth may be right for you, suffice it to say that if your advisors have talked to you about this strategy before, it may be even more appealing now that the value of your IRA may have recently dropped.
Make your retirement contributions as soon as possible. If you haven’t funded your 2019 plan yet, do it today. If you know what your contribution will be for 2020, do it now or as soon as you can afford to. If you are contributing to a 401K and like to buy on weakness, consider maximizing your contributions now rather than spreading them out over the entire year.
Notice I didn’t say invest it all now. Who knows when we will hit a low point with respect to equity investing? But we do know that many asset classes are now valued far lower than they were a month ago. Buying on a dip doesn’t’t always mean that you won’t lose money or that you’ll lose less, it only means that you are buying at a lower valuation that you may have recently.
The theory of making your retirement contributions now is that when you do start to invest, the cash will be there and you may be able to dollar cost average your purchases to take advantage of prices that may fall further. Once again, dollar cost averaging does not prevent losses or imply higher returns, it is merely one strategy of how to invest in risk assets.
You may want to harvest any losses. To do this you must actually sell an investment at a loss in non-retirement accounts. These losses may be used to offset other gains or other ordinary income up to $3,000. Beware the wash sale rules that would disallow any deductible loss if you repurchase the same security within 30 days of selling it.
If you plan to gift assets or add to a 529 plan, this may be a good time to put that in motion. Many people prefer to invest when the headlines are rosy and values are pushing new highs. That may be a good time indeed, but buying when everything is suddenly worth less may have long term advantages also.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.