April 06, 2020

The Dow Jones Industrial Average dropped a total of 10,000 points in 23 days during March. If you are a do it yourself investor sitting on your hands or your advisor is telling you to just hang on, you can do better. You need to be taking advantage of the opportunities that a lower stock market is giving you. I know it is scary to open up your statement and see your account balance drop so much but here are three things you should be doing right now to improve your financial position.

Rebalance. Now is the perfect time to make some money by rebalancing your portfolio. If you have been following my advice over the years you have a target asset allocation that you are comfortable with and that meets your investment goals. For example, let’s assume you determined that an overall allocation of 50% stocks and 50% bonds is where you should be. In the recent downturn your 50% stock allocation may have gotten as low as 40% of your total portfolio. No one likes to see losses, but they happen and when they do you need to take advantage of the situation. Just as you should have been reaping the profits and taking money out of the stock portions in your portfolio as the market has risen over the last few years, now you need to take some of your bonds or cash and buy stocks when the market is down. Now is the time to bring your asset allocation to stocks back up to 50%. Buying low and selling high over time is a winning investment strategy. When the market goes back up and your stock allocation is up to 55 or 60% take the profits from stocks and move it back into bonds. This is rebalancing. Most financial advisors are just telling customers to hang on. You are paying them to do nothing when they should be working for you.

Tax Loss Harvesting. In addition to rebalancing you can make money by selling investments in your taxable accounts that have lost so much value that you now have a capital loss. How do you make money by losing money? While it is true you are selling stocks when the market is down you are recognizing a tax loss that you can use. And you are replacing the investment you are selling with another stock investment. For instance, you can replace one mutual fund that invests in stocks for a different mutual fund that invests in stocks. One caveat, you cannot just sell a position to take a loss and buy back the same position within 30 days or it is a “wash sale” and the tax loss doesn’t count.

What you are doing is recognized a tax loss while still retaining the same amount of stocks you had before. You can now use that loss to offset other capital gains in other assets you may have. Or you can use that loss to lower or eliminate some capital gains you have in your portfolio. If you have $10,000 capital loss you can sell a position you have a $10,000 gain in and buy something similar. By harvesting these losses, you have just lowered your basis and eliminated future taxes.

Get Rid of the Dogs in Your Portfolio Get rid of your underperforming stocks and mutual funds. Almost everyone has underperforming investments. Now is the time to unload them when their value is down. How do you know if an investment is underperforming? Don’t look at the propaganda your mutual fund company sends you. Do your own homework. Lots of times mutual funds compare themselves to a very favorable index and they choose a time period where they look the best. If they use a 50-year history using an inappropriate index to show how good they are they could really stink in the last 5 years and it wouldn’t affect the 50-year record much at all. You want to know how your investments are doing now, not over a 50-year period.