When Life Throws You Lemons, Make Lemonade – Strategies During a Bear Market

No sugar-coating it; the start of this New Year is not what any of us hoped for.  Day to day life is highly uncertain, and investments are bruised.  While the cause of the current environment is unique and uncharted for every living generation, this too shall pass.  Periods like this can cause one to feel paralyzed, with nothing to do but wait it out.  However, there are strategies individuals can pursue that will position them to benefit when the storm begins to clear, and simultaneously help you restore a long-term mindset.

  • Dust off your budget and pay very close attention – particularly if income becomes uncertain. Evaluate areas where spending perhaps grew during good days; use the current environment as a reset and build emergency savings.
    • Avoid credit card debt: carrying balances from month to month is problematic and will destroy your wealth over time due to high interest expenses.  Use coronavirus stimulus checks wisely: consider using stimulus money to pay down or avoid taking on credit card debt.
  • Live Life at the Bank (even in retirement): individuals should strive to live their financial life (cash flow) with as much regularity and discipline as possible. It is important to not spend more than we make.  Those in retirement should strive to replicate the cash flow pattern of receiving a predictable fixed paycheck from investments that roughly satisfies or slightly exceeds your “typical month” spending needs.  Any excess should be saved in a cash savings account so that months where spending is higher can be satisfied from cash savings at the bank.
    • Budgeting and advance planning can help avoid lumpy withdraws – especially when the market is suffering a setback.
    • Strive to plan and communicate bigger cash needs from your portfolio well in advance (12 months into the future if possible).  This aids portfolio management and helps avoid selling from investments (particularly stocks) when a storm is ongoing and values depressed.
    • Avoid lumpy withdraws: big withdraws when the market is experiencing a pullback reduce your recovery.  They also constrain our ability to rebalance and be opportunistic buyers of financial assets that are now “on sale”.  We typically save slowly throughout a year(s); but withdraws often are lumpy and big, occurring at inopportune stormy times.
  • Harvest losses inside taxable accounts: Nvest evaluated taxable accounts in recent weeks and identified positions at a loss that would help reduce current and/or future year taxes. Important ingredient: sale proceeds should be reinvested so that potential market recovery is not missed.
  • Roth Conversions: market pull-backs make the strategy more attractive because income taxes payable on any conversion can be recovered more quickly via a swift market improvement. Careful however – this strategy requires keen awareness of your current year tax situation and the time horizon over which you plan to utilize retirement monies.  This strategy does not make sense as often as financial periodicals might suggest; we always urge caution and thorough consideration of all ingredients when it comes to accelerating the payment of taxes.
  • Review Employer Retirement Accounts: while annual rebalancing of retirement accounts is usually sufficient, dramatic swings in asset values over recent weeks likely caused the stock-portion of your retirement accounts to now be underweight. Evaluate if a rebalance is appropriate to restore the long-term target recipe, and ensure annual rebalancing is enabled (so that risk will be managed after recovery occurs).  Don’t suspend your automatic 401k contributions.
  • Consider suspending distributions from retirement accounts if money is not needed: recent legislation passed by Congress allows for suspending minimum distribution requirements for 2020.
  • Evaluate your current financial position: with financial markets significantly cheaper than 3 months ago, consider the current environment a great opportunity to add excess cash, accumulated over recent months from tax refunds or year-end bonuses, into your investment account(s). Don’t abandon recurring savings contributions if possible.  For the long-term investor, environments like this provide attractive entry points.
  • Refinance your home: the flight to safety in bonds and action by the Fed to cut interest rates caused mortgage rates to drop materially. Bad economic news often creates an opportunity for many individuals with a home mortgage to refinance at a lower interest rate.  Monitor rates; with low closing costs, even a reduction as small as 0.50% in your interest rate can save you big interest expense (and cash flow) if you intend to stay in your home for more than a couple more years.

In every environment, there are opportunities for those who retain a longer-term perspective.  Each of the above strategies requires a focus on the long-term, and can provide dramatic benefit to your net worth and financial flexibility down the road.

Author: Steve Henderly, CFA – April 2, 2020
Posted in Personal Finance, Quarterly Newsletters.