The coronavirus has really shaken things up in the last few weeks. People are scared. This is evident by the fact that most stores are completely sold out of toilet paper and hand sanitizer, not to mention the stock market has dropped more than 25% in the last few weeks because of the widespread fear.
In the midst of all this confusion we have to ask, what does all this mean for our money and your retirement? Let’s get into it.
The market is now officially in what we call a bear market. A bear market occurs when the stock market drops by at least 20%. Since 1900, we have had 32 bear markets. This would be number 33.
On average, we have a bear market about every 3.5 years and they usually last about 14 months.
Does this mean that this one will last exactly 14 months? Not necessarily. There is no way to know for sure. Do some people have some educated guesses? Of course, but they are still very much guesses.
The stock market has had an incredible 10 year run since 2010. This is probably why so many people are getting scared and selling. Most people got used to their TSP going in only one direction.
It is important to understand that a bear market is just a normal part of the economic cycle. Can bear markets be scary? Absolutely. But we have to remember that the market has done this 32 other times and has since recovered marvelously every time. We have to keep everything in perspective.
With that being said, this downturn can be a real problem if someone was not investing for the long-term. It was easy to make money in the last few years but in these turbulent markets, you have to make sure your strategy matches your time horizon and goals. If someone was in funds that were too aggressive for their timeline, their accounts may be way down right at retirement which is when they need the money the most.
On the bright side, this downturn actually presents a number of financial opportunities that haven’t made sense until now. Here are some suggestions that might make sense for you:
Take Advantage of the Cheap Prices
The stock market is the one thing that causes everyone to freak out when it goes on sale, but this doesn’t have to be you. As long as it makes sense for your long-term plan, consider investing more in the C, S, or I funds now that prices are down. When most people are scared and are going to 100% G fund, you can take advantage of the lower prices.
Now, it is important to note that we don’t know when prices are going to stop going down. They could keep falling for 3 years or jump back up tomorrow. There is simply no way to know for sure.
All we do know is that prices are lower than they’ve been for 3 years. Because of this, it could make sense to double down on stocks, but you have to make sure this action would support your long-term plans. For example, a retiree who is going to need his investments in the next 1-3 years can’t afford to be very aggressive. The story is very different for someone that has more time before they need their money.
Consider a Roth Conversion
For those retirees out there who have already rolled their TSP accounts into an IRA, it may be a great time to do a Roth conversion. A Roth conversion is when you convert a traditional IRA into a Roth IRA.
At the time of conversion however, you would have to pay the taxes that you owe on your traditional IRA dollar,. but because the market is down right now, your traditional IRA balances will be lower and subsequently your tax bill goes down as well. Once you convert to a Roth, you won’t have to pay taxes on that money or earnings ever again.
Look at Refinancing Your Home
In reaction to all the turmoil in the market, interest rates have dropped to a new low for the year. It may make a lot of sense to refinance your home at this lower rate. When making this decision, just make sure you take all of the fees into consideration as well.
The bottom line is this. If you are investing with a long-term strategy that matches your needs, you don’t have to be scared. You just have to ride out the wave and if possible, take advantage of the opportunities along the way. There will be coronaviruses, natural disasters, and housing crashes throughout your lifetime but you have to trust in your long-term plan. You can find peace in the eye of the storm by knowing that good things happen to those that can stay calm while the world is in chaos.