What investment moves should I make in a recession?

 

Thank you for checking out Telos Financial’s Plan for your Purpose financial planning blog. The purpose of the blog is to introduce financial planning topics I believe are important. I want to start discussions about that will educate, benefit, and improve your financial life. Ultimately, to help you focus on your telos!

 

When markets are bumpy and are headed down, it can be scary for any investor. It’s never a good feeling to lose money, even in you understand it’s short term or just on paper. It’s important to remember your long term goals when these times come.

 

Warren Buffet famously said, be “fearful when others are greedy and be greedy when others are fearful”. There are a lot of opportunities when markets are bumpy and it may be a good time to reevaluate.

 

Here are three things actions that might make sense in your investment portfolio.

 

First, review your investment allocation compared to your target allocation and make any corrections. Second, consider making roth contributions; whether a standard contribution if you qualify, a backdoor if appropriate, or maybe convert Traditional IRA. Third, consider tax loss harvesting.

 

Investment Allocation

It’s important to periodically review your investment allocation to make sure it’s in line with how you want it to be allocated. Whether it’s 60/40 equities to fixed, 80/20 with US equities to international, 40/30/30 large/mid/international – it’s important to periodically make sure your allocation matches what your target is, so over the long term you get the performance you expect.

 

When markets are moving quickly, asset classes can perform very similarly or very differently. It’s important to know which is happening and make decisions about reallocating or letting things stay if you expect them to come back into line. Maybe this means making trades. Maybe it means adding more cash to your investment portfolio to boost an underrepresented asset class or category.

 

The bottom line here is, when markets move quickly, dramatically, or in one direction for an extended period, it’s important to review the allocation and make sure it matches what you want, even in a buy and hold strategy.

 

Roth Contributions

If you’ve read any of my other blogs, you probably know I’m a big fan of Roth IRAs. The younger you are when you start adding to a Roth, the more sense it makes too.

 

Many of my clients face the (very fortunate) problem of making too much money to contribute to a Roth, in that case, there are alternative ways to add to your Roth IRA. I’ll highlight a few here. There’s the backdoor Roth IRA option, I’m a big fan of this strategy, but there are many little rules to pay attention to. You can convert a traditional IRA to a Roth, but know you’ll have to pay income tax on the conversion. If income is down related to a recession, it can make a lot of sense to do this. There’s a Super Backdoor Roth contribution for the very high income earners whose work plans allow this strategy. And of course, for many it probably makes sense to make Roth contributions through your employer provided plan in the first place.

 

Adding to a Roth when markets are down makes a lot of sense (for long term investments) because you are buying equities at a lower price (as markets are down) and any gains will not be taxed in Roths, as long as you follow the withdrawal rules.

 

Tax Loss Harvesting

I’m not going to go into great depth about this strategy, but it’s something that can be done very well when markets are down. Ultimately, tax loss harvesting is a strategy where you sell some investments at a loss and buy other similar investments with the proceeds. You then have the loss to offset future gains or perhaps gains you’ve already realized from past transactions.

 

For example, if you bought Pepsi stock for $100, then the market fell 35%. If you sell, you’d get $65 and you would have a capital loss (let’s assume long term for sake of discussion) of $35. You could then immediately buy Coke stock (if you felt that was a comparable stock/company with a similar or better outlook) and you’d be able to use the loss on the next gains you had.

 

This strategy has benefits and drawbacks. The benefit is having some control over your losses and gains, which helps you have some control over your taxes. One of the downsides is there are costs associated with trading, so you may have some drag and inefficiency associated with that. Another drawback is you have to make sure you are able to buy a suitable replacement asset.

 

Financial Plan

A fourth freebie strategy is to review your financial plan. When markets are down, it’s a great time to stress test your plan. Are you still on track? Will you be on track when things recover? Do you need to adjust any assumptions because of changes with your employment?

 

It’s always a good time to review your financial plan, but when it’s being stressed is a great time to review how it’s looking. There will be more recoveries and more down turns.

 

Conclusion

Don’t ignore your portfolio when the markets are down or a recession hits. It’s important to review and take advantage of opportunities when you can. Recessions are fairly infrequent in the economic cycle and bears are less frequent than bulls in the markets, so when these happen, you may be able to take advantage.

 

If you’re a DIYer, make sure you’re doing your research. If you work with a financial or tax professional, as I strongly encourage, contact them to discuss your personal situation and what is most appropriate for you and your family.

 

If you want to pursue your options for adding to a Roth IRA, tax loss harvesting, or reviewing your investments, Telos Financial may be able to help you. We offer holistic, full service financial planning, hourly planning for specific services, and monthly retainer service for those just starting out. Contact us to schedule a free introductory meeting and we can talk more in person. Telos is Michigan’s financial advisor for high income and high net worth millennials recent college graduates, and small business owners.

 

Telos Financial is a fee based, holistic financial planning firm located in Plymouth, Michigan serving young professionals and their families. Dennis LaVoy is a Certified Financial Planner® Designee and a Chartered Life Underwriter®. He founded Telos Financial and to provide fiduciary financial services to families across Michigan including Plymouth, Canton, Ann Arbor, Detroit, and as well as all over the great United States of America.