Dealing With A Downturn

The day after any Wall Street meltdown none of us will know whether today is a spectacular buying opportunity or the beginning of a bloodbath that will push our retirements out until we are 85. The most important thing is to remain calm and think. Panicked investors sell when the market is down and buy back in after it recovers. Don’t do that.  Here are a few things to consider to ease the pain.

If your holdings are all in index funds, then there isn’t much you need to do. Buy and hold is the strategy there. You might want to sell some of your bond funds and buy more of your index funds to rebalance your asset allocations. That strategy is the illegitimate child of dollar cost averaging and buy low, sell high. Selling bonds to buy stocks in a down market takes fortitude, but it’s a lot better than doing the same thing post-recovery.

If you still own actively managed mutual funds or individual stocks, you could use a tax-balancing approach to exit both the high cost and the losing funds, or just do some tax loss harvesting to minimize future taxes. If you’ve been waiting for an opportunity to move some mutual funds that performed well in the past, but that are eating you up with high management fees, now may be your time. Sell losing shares of stocks or mutual funds and sell the most expensive mutual funds using the loss to offset funds that held their value. Then use the money to buy your preferred index funds with a minimal or zero tax effect.

If you are just harvesting loss, note that you have to wait a month to rebuy shares of a security you’re selling for a loss, and you can’t sell securities you’ve held less than a month to take a loss. And of course, it makes no sense to sell shares in your tax-protected retirement account–no tax losses to harvest. You can use your losses to offset any investment gains you have at the end of the year and up to $3,000 in ordinary income. If you lost a bundle, you can carry forward unused losses too.

If you’re sitting on some cash you intended to invest, now is the time to get it working–unless you think you’re going to need it within two years. Timing the market is a bad bet, but after a disaster, it doesn’t take deep insight or genius to recognize indexes that you feel should recover quickly, ones that pulled down from emotion, not fundamental challenges. The market will probably bounce around a while, and you won’t likely find the bottom. Watching the value of the cash you just invested dwindle is going to take some fortitude, but be brave. You just bought in at a deep discount. The market will correct. Don’t get goofy and buy individual stocks. Some companies may not recover. Indexes almost certainly will.

Keep perspective. Don’t make radical moves. That’s about it.

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The Retirement Trap Copyright © by Bill Babcock and Babcock, William. All Rights Reserved.

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