published by Scott Danek, CEO, CERTIFIED FINANCIAL PLANNER™
There are very concrete steps you may be able to take to turn the recent Coronavirus-concern market volatility in your favor.
Consider Refinancing Your Mortgage
Rates have recently fallen to levels not seen since the Great Recession. I’m actually in the process of refinancing my own mortgage that is only six years old, and will save thousands of dollars over the course of the loan and get the loan paid off much quicker as a result. As you explore your options, think about how long you plan to stay in your home. In our case, the cost of refinancing will take under two years to recoup in the form of interest savings, and we plan to be in our house for many, many years.
Recently we reviewed a client’s situation and found that while there was a big difference in her existing interest rate compared to what she could get. In her case, loan is small enough with few enough years left to pay that it just wasn’t worth refinancing even though their current rate is quite high.
Remember Your New Contributions LOVE This Market Volatility
If you’re still working and contributing to your retirement plan through work, you are dollar-cost-averaging. This is paying a fixed amount of money (your deferrals from your paycheck) for something that’s changing in value with each purchase. For example, if you are having $100 taken from your check and what you are buying costs $25 per share, you can buy four shares. If it goes down 20% to $20 per share, you now will buy five shares.
Generally speaking the more stocks that are in the investment the more the recent market volatility will cause what you are buying to change in value. This is why some people for their new contributions, but NOT their existing balance, choose an investment that is heavier in stocks than bonds. For example, your existing balance may be invested in a ‘2020’ or ‘2025’ fund, which will be most likely 55-60% in stocks. For new contributions (some companies call this ‘investment election’ or ‘investment selection’), you could use a 2040-2060 fund that will be much more invested in stocks, go up and down in value more, and allow you to buy more shares when it is down. The key is having enough time to allow those shares to go back up in value before you plan on selling them.
Have Your Investment Portfolio Stress-Tested
Whether you know it or not you have a risk tolerance that can be quantified. Meaning, it can be calculated to a much finer degree than ‘Oh, I’m middle of the road’, or ‘I am fairly conservative’. The risk of your various investments, accounts, and portfolio can also be quantified, and then compared to your risk tolerance.
The start of this two-step process is our Risk Survey. When used with our Digital Allocation Tool it really helps shed light on whether our clients are taking too much, too little, or just enough risk. We also conduct a ‘planning overlay’ that takes into account when clients will and/or should be taking money from which accounts based on their retirement expense needs, minimizing taxes, and most importantly checking items off their bucket list.
This type of planning is especially helpful when market volatility occurs. If one has money they are not planning to use ‘anytime soon’ they may be able to take more risk buy buying when stocks are low, while still staying true to their overall risk tolerance.
Stress-testing is even more helpful when someone is approaching retirement. The closer you are the less time you have to recover from big losses, and the more the sequence of your returns (meaning do you initially make or lose money right after you retire) matters to your long-term success. It also reduces the likelihood that you’ll be forced to sell into losses to fund that next bill, expense, or bucket list trip.
In summary, market volatility occurs at times when you least expect it or want it to happen. These are steps you can take to reduce its negative impact and turn it to your advantage. If you’d like to see if these or other techniques could add value to your planning and peace of mind, please start with our Risk Survey or call us today to get you in touch with one of our advisors who can help.
The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. Actual investment results may be more or less than those shown. This does not represent any specific product [and/or service].