Actions to Take in a Market Downturn

April 22, 2020 1:47 PM , Updated May 6, 2020 7:37 AM
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Illustration of a man carrying a pink piggy bank on his back with coins falling out of it as he runs from COVID-19 coronavirus cells falling from the sky and heading towards him

A market downturn, bear market, or whatever you want to call it can be scary for the most seasoned investors. Investors can easily go through an emotional roller coaster from highs to the lowest of lows which will find many contacting their advisors to see what they should be doing.

Many of those calls to advisors are going to be met with phrases like:

  • Stay the course
  • Don’t do anything
  • Relax, it will come back

While each of these three phrases may be correct, investors can get tired of hearing the same thing over and over. So what should an advisor be telling you during these tough times? 

MOVE TO THE G FUND!

I’m kidding, seriously, KIDDING! Please don’t make any rash decisions and definitely don’t move your TSP to the G fund without considering the consequences.

Assess your current situation and plan and act accordingly.

Here are some things that you can control and may want to consider right now.

Continue to contribute

I have received emails form feds over the past month asking if I think they should quit contributing to the TSP. NO and NO!

If anything you should look at increasing your TSP contributions during market downturns. Increase them for a period of 3-6 months. But whatever you do, DO NOT stop contributing.

Rebalance

If your plan calls for a portfolio of 60% stocks and 40% bonds, it has probably shifted to closer to a 50/50 portfolio in the past month. This could be a good time to reallocate and sell some bonds and buy stocks after the drop.

This doesn’t guarantee that stocks won’t go lower, but, you are buying low. Another way to look at it is if you favorite store was having a 25% off sale, would you rather shop then or shop when everything is regular price?

Tax-loss harvest

When accounts are down it may be advantageous to sell positions at a loss in your taxable accounts. These losses can be harvested to reduce future income and offset capital gains. You are allowed to deduct $3,000 of losses from income and the rest can be carried forward to future years.

Refinance your mortgage

I have never seen mortgage rates this low. They change daily, but a couple of rates I have heard in the past week are 2.875% for a 30 year and 2.375 for a 15 year. These rates are CRAZY low!

Do a Roth conversion

Now may be a great time to do a Roth conversion. For the person that has an IRA that was worth $30,000 and may now be worth $20,000, now may be a good time to convert to a Roth and make your future growth income tax free.

Reduce distributions

If you are already retired and taking distributions from retirement accounts, can you reduce them? Maybe live on a little less for a time period of 6-12 months? Little things like this could give your investments time to recover from losses.

Evaluate

What have you been doing that has made this time easy financially? What have you been doing that has made it hard? Take a few minutes to evaluate your financial practices and adjust going forward to make things easier the next time around.

The stock market is something that we can’t control, but there are many other things we can do to put ourselves in a better position going forward. Do what you can now so that you can enjoy the benefits in the future.

© 2020 Brad Bobb. All rights reserved. This article may not be reproduced without express written consent from Brad Bobb.

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About the Author

Brad Bobb is a financial planner with over a decade of experience working with federal employees. He is acutely focused on the financial livelihood of employees who are part of the CSRS or FERS systems. Any federal employee with a question can email him or visit bobbfinancial.com.

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