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Senior Vice President & Region Head, West Coast Region, Financial Counseling
Senior Vice President & Region Head, Midwest Region, Financial Counseling
Clients are nervous about the market, no matter if they have a big portfolio or a small one. As news continues to come out that is more and more severe, some clients have asked if they should pull out of the market, wait on the sidelines and then reenter at the bottom. Our jobs as advisors are to reframe the conversation toward a long-term view. Historically, the market recovers over time and has reached new highs, but one cannot time the turnaround. If I had suggested to my clients that they enter the market at the lows of the 2008 financial crisis, 99% would have said no. Especially at times like this, it is important to take emotions out of the decision-making process and focus on long-term strategic allocation.
If you’re nearing retirement, it’s important to focus on asset allocation. We recommend having six months' to a year's worth of cash on hand to protect your portfolio. With that money on the sidelines, it is easier to weather the storms with peace of mind and take a longer-term view of your investments.
It is also important to match your fixed income with your risk tolerance. Clients need to have a realistic understanding of what their spending needs are going to be, and plan accordingly. Having a good plan going into retirement is just as important as any other factor.
If you have a good retirement plan in place, it is important to stick to the plan. Over the long-term, it will allow you to live the life you want to live in retirement. When you’re no longer earning a salary, it’s even more important to keep assets in the market for when it rebounds because there’s less opportunity to invest more capital in your portfolio. Anyone having a conversation about their retirement plan with a financial advisor should make sure they can handle a shock to their portfolio while keeping a long-term view.
Every investor is different, but now is a good time to have an honest conversation about risk tolerance. Rebalancing is okay, and we’ve seen some clients selling fixed income and buying equities. But investors should be prepared for further potential drawdowns in equities and in that scenario, they might need to rebalance again.
For many, the right course of action may be waiting until market volatility calms down before reallocating. It all depends on your tolerance for additional volatility and drawdowns.
If your assets are properly allocated according to your risk tolerance, stick to the plan. If not, now may be a good time to make adjustments.
It also might be a good time to take advantage of in-plan Roth conversions. While the market is down, converting out of a traditional 401(k) and paying taxes on the current value could be a significant planning opportunity. The assets would then take on the Roth characterization and you would avoid taxes on appreciation, dividends, etc.
Read Part 2 of this series >
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Updated for tax year 2020
Updated for tax year 2019