We are living in unprecedented times -experiencing a world-wide pandemic, which translated to a financial crisis. It is surreal. A few weeks ago, we were leading our normal lives, and seemingly overnight everything changed. People grew sick, businesses closed, employees were asked to remain home, and we all found our lives shaken. During the first week, most of us were glued to our televisions, as we watched this crisis unfold. Americans are a resilient people. I am old enough to remember Y2K, 9/11, and Credit Crisis of 2008. Following each of these events we heard of amazing stories once the shock wore off. Now that the initial shock has been absorbed, the time has come to decide what course you wish to take -succumb to the fear, or act.
Consider these 5 steps, and you might find yourself in a better place.
1. Stay Healthy!
It is critical to follow the direction of health officials -hand washing, social distancing, etc., yet there is more. Take responsibility for your personal well-being. Consider this period of confinement an opportunity and take extra good care of your health.
Begin by following a routine. This includes getting plenty of sleep, staying hydrated, eating well, praying or meditating, and EXERCISING. You can practice social distancing and getting outdoors. I personally went outside and began a vegetable garden -something I wanted for years. I also began a “News Diet”. That’s right, I stay informed by limiting my exposure to the news media and try following official sources. Remember, our national news media has an interest in keeping you alarmed, as sensationalism is good for sales.
2. Reduce Expenses -Using Simple Strategies:
I lead a busy lifestyle, and before this crisis I found myself saying that I should cancel or change one service or another, but never found the time. Individuals and small business are struggling with losses of income, so this is a good time to reduce expenses.
Here are a few ideas that worked for me. First, I renegotiated with vendors. I have phone services for my office that were about to renew. I called my provider and received the same services for less cost. This also worked with my internet provider, so I subsequently contacted each vendor, and I found some willing and some not.
Next, I eliminated unnecessary expenses. My cable provider was not willing to change my contract; however, it did make some great recommendations. For instance, I lease cable boxes for each television in my home. I learned that newer televisions have them already built in. I switched over to the television tuners and will be returning the boxes shortly.
Finally, I live in a colonial home. My love for its historic architecture is offset by the high cost of keeping it warm. I use a lot of fuel oil, and since oil prices have plummeted, I contacted my oil company and locked in an unbelievable price.
3. Investigate Refinancing:
Interest rates are at record lows. Whether it is your home mortgage, your auto loan, or your credit cards, you should contact your lender. They may offer refinancing options that can lower your payments or can reduce the time you pay.
4. Manage Your Investments:
We are all feeling pain here. Watching our investment portfolios decline during this turbulence is not for the weak of heart. That said, let us put things into perspective. It is important for us to distinguish between “Statement Value” and “Actual Value”. Statement Value represents the value reported on any day -it goes up and down. Actual Value is the amount you have once liquidated.
One of the fundamentals of investing is understanding when to hold and when to sell. The important takeaway here is that when selling during down markets you convert Statement Value to Actual Value, making the loss real. Look at your portfolios and assess its holdings. I have seen many investors sell great companies and great investments, mainly because the statement value is down. This makes no sense. Do you sell your home because the appraised value goes down on any day? Review your investment time horizons -matching them to your different accounts, and if you believe you have quality investments, consider “Staying the Course”.
That brings us to rebalancing versus asset allocation. Asset allocation is the mix of different asset classes intended to reduce risk through diversification. Rebalancing brings the allocation into alignment. For instance, suppose you had a 60% stock and 40% bond portfolio in your 401(k) plan. That is your allocation. Assuming this was an appropriate mix for you, and today, due to market volatility, it was 50% stock and 50% bond. You would sell bonds and buy stock to bring it back into alignment. This is called rebalancing. Most participants in retirement plans utilize portfolio models that do this automatically, such as Target Date Funds. These techniques should be utilized, as a diversification strategy.
Finally, we should discuss liquidating funds from your retirement portfolios for meeting emergency needs -either through loans or distributions. The recently enacted CARES Act allows you access to your retirement funds for those affected by the pandemic. It permits withdrawals with our incurring the usual 10% penalty and spreads the tax on the income over three years. While this is more favorable then before the legislation, I remind you that these distributions force you to liquidate in a down market. You should consider this a last resort, since this an expensive way to get funds. Recent legislation also extended the filing deadlines for federal Income tax.
This is very helpful for business owner that pay quarterly estimates, however if you anticipate a refund, do not wait. File early and use this money for your income needs.
5. Save More Now:
This option may not be reasonable for everyone yet think about this. If you are still working, and have the means, you can purchase long-term investments in this down market at a significantly reduced price. I am not saying you should time the market, but by increasing your contributions to your company sponsored retirement plan you can use a technique called “Dollar Cost Averaging”.
This strategy’s goal is to reduce the overall impact of volatility on the price of the target asset, as the price will likely vary each time one of the periodic investments is made. It can improve the performance of an investment over time, but only if the investment increases in price.
Any one of these steps alone will not assure you of financial success. However, by combining them together you will be better equipped to survive this crisis and thrive.
Please feel free to contact our team of financial advisors at (860) 521-401K with any questions or concerns you may have.
*** As with any investment strategy, there is potential for profit as well as the possibility of loss. All investments involve risk (the amount of which may vary significantly) and investment recommendations will not always be profitable. Past performance does not guarantee future results. CRN202203-262369