What to Do in a Down Market
Financial markets are designed to value companies and assets using all available information. This is called the Efficient Market Hypothesis. Investment companies have built systems to act within fractions of a second when news is released to get an edge on competitors. Whether you believe in efficient markets or not, it does mean one thing for certain: financial markets react quickly to breaking news. I am writing this on March 11, 2020. If you happen to be reading this at some point in the future, let me tell you how the news has been over the last month…terrible.
The Coronavirus has taken over every headline. It started in China and has spread throughout the world. China has essentially been shut down for most of this year. Italy is now under a nationwide quarantine. New York is under containment zones and the state is producing its own hand sanitizer. President Trump is banning travel from Europe. March Madness will be held without fans. The NBA has suspended its season. Each day seems to have a new story that is causing more and more panic.
Panic is never a good strategy for your finances. The stock market averages are down about 20% in the last few weeks. I completely understand if the Coronavirus scares you and you have stocked up on toilet paper, soap, and jerky. Whatever makes you sleep better at night. However, you should not make investment decisions based on fear. Instead, let’s look at some things that you can do right now while the market is down.
Make your 2019 IRA contributions – Have you maxed out your IRA contributions for 2019? You have until April 15 to make these contributions. The market could still go down, but your investments missed this big drop.
Make your 2020 IRA contributions – You can get a head start on your current year IRA contributions. If your IRA allows, you could even keep it in cash within the IRA. That would allow you to invest some now and spread the rest over the year. You could wait for some positive news, but that may result in you missing some gains from these low prices.
Raise your retirement contribution rate – Log in to your 401(k) and raise your contribution by a percentage or two. You can always lower it in a few months but try to put a little more into your retirement accounts while the prices are low. If it continues to go down during the year, you will be buying more shares with the same amount of money.
Do a Roth conversion – If you have been planning on converting a traditional IRA to a Roth IRA, now may be a great time to do that or even a portion of it. You will pay tax on these conversions based on the dollar amount at the time of the conversion. Let’s say your IRA was valued at $100k and it is now valued at $80k. You can do a direct rollover to a Roth right now. Your investments will stay the same, but your taxable income for 2020 will be $20k less.
Refinance your debt – Interest rates usually fall in situations like these. This can provide a great opportunity to refinance your mortgage, car loan, or business debt. Student loans should also be evaluated. However, make sure to review your student loan types because refinancing may disqualify you for various repayment programs.
Reevaluate your financial plan – This market drop should not have impacted your financial goals. If you are near or in retirement, your portfolio should be able to withstand a down market. If you are under 50 and planning to retire at 60 or later, this is a great time to put a little more into your retirement accounts. This is exactly why you have a written financial plan. Take a moment to look at your plan to make sure this doesn’t impact any of your goals.
I have no idea what will happen to the stock market over the next few months or years. You will see many articles telling you to buy the dips or sell everything before the market falls even further. Both of those could be the right decision. It just depends on your circumstance. The woman who sells today and eliminates the risk of losing more money that she needs for a down payment on her house in two years did the right thing. She could have earned more, but she accomplished her goals. The 35-year-old man who invests more in his retirement at this price and watches the market fall for a year but continues his investment plan also did the right thing. Even if he predicts the exact bottom of the market in 2021, he can’t go back and make 2019 IRA contributions because that opportunity ends on April 15. One person buys and one person sells on the same date. They both made the proper decision for their financial goals.
Panic is not a strategy, nor is it part of any financial plan. Take a minute to evaluate your situation, then act based on what you need to accomplish your goals.
Mike Zeiter, CPA/PFS, CFP®
