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Is this the time you have been waiting for to make a move? Or are you just reacting?
Procrastinators may find the current investing-market conditions to be an advantage, while reactors may do something without considering the whole picture.
We know that selling because the market is down is not a rational approach to rebalancing investments. Despite your head spinning with the rise in mortgage rates, drop in the stock market and acceleration in inflation, do not let fear set in.
Even if your crypto account took a major dive and failed to rebound or your high-yield bonds are falling, procrastinators need to act quickly, and reactors need to be smart.
Is this time to panic and sell? Or is this a buying opportunity? Or are you succumbing to herd mentality?
Group think is difficult to avoid when your retirement statements show a loss while the declining stock market is headline news. Behavioral finance addresses this issue, as it’s about emotion and instinct rather than rationality. If you do not want to appear foolish, you sell what investments you have or worse — you stop contributing to your retirement plan.
If you tend to be a procrastinator, there may be opportunities for you. If you tend to be a reactor, then slow down and ponder before you act. Ask yourself these four questions:
1. Do I need to rebalance my portfolio?
Has it been two years or three years since you have reviewed your investments? With the recent returns in the stock market, your original target mix of stocks to bonds may be off-kilter. The first step is to revisit your overall financial plan. Then, the current portfolio, not the overall market. Do they fit together? What is the timeline for this money?
Reduce risk? If you are an older investor, you may want to lower your risk. The older you get, the more conservative your total portfolio needs to be, including your retirement account, to reduce volatility.
Or, if you have noticed for years that your stock portfolio is now three times more than your fixed-income portion of your investments, this is the time to realign. By selling your investments that have a capital loss and others that have a capital gain, you can manage any income tax potential, as the losses will offset the gains. Paying no income taxes on the gains may lighten the emotional load of the portfolio’s decline. This applies to brokerage accounts as there are no tax implications in your qualified retirement accounts.
Add risk? If you are a younger investor, you have time ride out market volatility. Have you been sitting on the sidelines? Have a small stockpile of cash that you keep meaning to invest? Or are you 35 years old with an extremely conservative portfolio you kept meaning to change? Now is the time for action. You can dollar-cost average and get in over the next month or two.
2. Do I have cash on hand? Do I have extra cash?
One thing for sure in this unpredictable world, we all need cash at some point for an unexpected expense. Depending on which study you read, between 39% and 58% of Americans do not have $1,000 in cash savings in the bank.
Selling an investment at a loss is never easy to do, but having a purpose is helpful. Build a cash reserve to prevent a future stressor. Preventing a large credit-card balance or knowing how that repair bill will be paid or how lost wages will be replaced ahead of time is an invaluable use of money.
Are you paying off variable rate loans, like home equity? Then this is the time to pay it off faster. Use your extra cash to make an extra payment or add another $100 a month to your principal payoff. Or finally pay off credit cards or any other variable rate loan. Otherwise, you will find yourself paying more interest with rates rising.
3. Is it finally time to sell an investment?
If you were gifted a stock that never fit your investment style or values, this may be the time to sell. For example, those who want to “green up” their portfolio may have been dreading the tax hit they would take because of the capital gains of the gifted stock. With this recent stock market swing, you may have hit a sweet spot to act and buy what fits your investment objectives.
4. Why am I changing my investment brokerage?
If you want to leave your investment broker or platform because returns are down, that is not a reasonable investing rationale. The market is down, simply put. A new investment company cannot change that fact. But if you have been considering switching because of other reasons, now may be the time. Remember that if you leave, you may have to sell their products you own or you may be able to transfer your holdings to a new firm. If you sell, you will pay taxes on the capital gains.
In the long run, you may save money on fees and commissions and have a stronger portfolio by switching firms. If the capital gains on proprietary products have created hesitation, now is the time. No longer having large capital gains on those propriety products means those can be sold with less of a tax bill. The other investments can be transferred to the new firm.
Sound good? Then, make some changes today.
Just be aware of wash-sale rules. An investor will not be able to claim the loss on an investment for tax purposes if they sell it and then purchase the same investment within 30 days. Not to worry: Only propriety products will need to be sold to make the transfer. Stay on top of wash-sale rules on cryptocurrency as well. Timing and tax rules can work for for against you.
Remember, when selling outside of your retirement accounts, the cost basis is critical to calculate the actual capital gain or loss. Gather this information now for next tax season. A recent statement should have the purchase price or dig a bit deeper into your financial history to find what the stock or mutual fund was valued at when you bought it.
Whatever option you chose, sometimes you need to look at your investment strategy, not the trend in the market. You need to understand what the money is for, who you are and what your timeline is to use the money. That helps you make a better decision whether you are a procrastinator or not.
CD Moriarty is a certified financial planner, a columnist for MarketWatch and a personal-finance speaker. She blogs at MoneyPeace.
