We are in unique and uncharted waters during this COVID-19 pandemic that has created what many believe is the most significant crisis since the Great Depression. Only time will determine if that is an accurate characterization of this environment. In times of challenge we need to look for opportunities, because every challenge creates an opportunity.
As a financial adviser and a Certified Financial Planner practitioner, I spend a great deal of effort to help people identify risks to their financial life and help shelter against those risks. At the same time, I look for opportunities to help improve their situation. The current environment is a great teacher to reinforce many financial lessons that I will discuss in a future column.
However, there are steps we can take toward a better future.
Evaluate refinancing your mortgage to a lower rate. The national average for 15-year mortgage rates dropped significantly in the past 18 months to rates similar to late 2016 and approaching the all-time low set in early 2013. The national average for 30-year mortgage rates are at nearly a 40-year low according to May 7, 2020, data from the Federal Reserve Bank of St. Louis. Refinancing to a lower rate will improve your cash flow and refinancing from a 30-year to a 15-year loan (if you can afford it) will significantly lower your long-term interest cost.
Reassess your risk tolerance and long-term investment strategy. Market and economic stress create a great deal of volatility in investment markets. Within that volatility sits many risks and many opportunities. Investors with a long-term investment horizon might want to evaluate their current cash positions and current investment mix against their long-term goals. Periods of market stress can be a great long-term buying opportunity with available cash. It is important not to get overly focused on recent market results, but instead focus on the potential of an investment from this point forward. Some industries or companies might thrive during a recovery whereas other industries or companies could see a continued decline for many years to come. Navigating these risks and opportunities requires focus. Not all investment segments rise and fall in similar fashion, which makes portfolio rebalancing important.
Boost your retirement savings. It is common during challenging markets for people to see losses in their 401(k) statements and subsequently stop contributing. This is the opposite of the strategy recommended for long-term saving. Investing at lower prices produces better long-term returns, so 401(k) participants might want to increase salary deferrals during these difficult times if possible.
Evaluate a Roth IRA Conversion. The conversion of a Traditional IRA to a Roth IRA must be evaluated carefully on an individual basis. For those considering a Roth conversion, the current environment of low tax rates and depressed investment values represents an opportunity for a lower tax impact upon conversion.
Evaluate unrealized capital gains in your investment portfolio. It is not uncommon for long-term investors to hold securities that have appreciated significantly in value through time. These securities can grow to represent a significant concentration within the portfolio. One of the main reasons investors are hesitant to sell the securities to reduce the concentration is the capital gains taxes that must be paid. Concentrated positions might have fallen in value during this crisis and gains might be significantly lower if recognized now.
It is important to reassess your current financial situation and your investment profile to determine where you have opportunities in your financial life. During times of stress it is common to hunker down and preserve what you have. That might be important in certain areas but stepping back and looking for opportunities might illuminate great new avenues for success.
This information is being provided only as a general source of information and is not intended to be the primary basis for investment decisions. It should not be construed as advice designed to meet the particular needs of an individual investor. Please seek the advice of a financial advisor regarding your particular financial concerns. Consult with your tax advisor or attorney regarding specific tax issues.
A Roth IRA is tax free as long as investors leave the money in the account for at least five years and are 59½ or older when they take distributions or meet another qualifying event, such as death, disability or purchase of a first home.