Some say the U.S. stock market will be strong in 2019 while others say we are heading for a recession. No one knows for sure. Economist Paul Samuelson famously said, “The stock market has forecast nine of the last five recessions.”
The stock market was far more volatile than investors would like during October through December, with the S&P 500 declining 9.2 percent during December alone. For all of 2018 the S&P 500 declined 6.2 percent. Most investors have a long-term perspective, so they expect some declines. However, no one wants another recession like the one that began in late 2007 and continued through March 2009 when the S&P 500 lost 54 percent.
Investors realize that we – as individuals – cannot predict or control the economy and the stock market. It is always best to not worry about what we cannot control, and to keep our focus on factors within our control. Today’s article is part one of a two-part series about staying calm when the stock market is not. Today we will focus on how to do a financial review of your investments. Next month’s article will address the personal factors that can help you stay calm.
REDUCE RISK: If you suspect you have too much risk in your investments, make changes now to lower it. Many financial advisers prefer the term “tolerance for loss,” rather than tolerance for risk. This is because psychologists have shown that people experience roughly three times the stress from a loss than from a gain. So, if the recent market volatility caused you severe anxiety, you may have too much risk in your investments.
REVIEW EVERY INVESTMENT: Using Dec. 31, 2018, data, determine if each investment still deserves to be in your account. I do this sort of due diligence on an ongoing basis for my clients, and I recommend you do it at least once a year. If you have a financial adviser, ask them to provide you with performance reports and a financial review. If you are a do-it-your-selfer, use the website for the investments you own.
Reviewing each investment does not mean you should sell it if it had poor performance. Most U.S. and international equity mutual funds lost money in 2018, but they may still deserve a place in your portfolio. By reviewing them (over several years), you can compare them to their peers and determine whether you want to continue holding that investment. You may decide you want to replace several funds with a balanced fund or an index fund with low fees.
MINIMIZE FEES: If you suspect you have high fees within your investments, make changes to lower them. If you are working with a broker or a financial adviser, ask them to provide you with a list of fees from all sources that impact your investments. This may include quarterly or annual fees, commissions, expense ratios, referral fees, wrap fees, trails and 12b-1 fees from mutual funds. You have a right to know every fee, because fees reduce your investment performance.
TAKE ADVANTAGE OF A ROTH IRA: Are you missing an opportunity to fund a Roth IRA or to convert a portion of a traditional IRA to a Roth IRA? Recognizing that we are moving into tax season, chapter eight (“Wise Tax Strategies”) of my book, “The Joy of Financial Security,” is available free on my website by using the following link: thejoyoffinancialsecurity.com/taxes.pdf. This chapter provides tips from a concept known as “three tax buckets” and provides information on the many benefits of Roth IRAs.
If you are eligible, open and fund a Roth IRA now. You can still fund the Roth IRA (up to $5,500 for persons under 50 and $6,500 for persons 50 and over) for tax year 2018 until April 15, 2019. You can also fund it immediately for 2019, and the limits have increased to $6,000 for persons under age 50 and $7,000 for persons 50 and over.
Investments can be intimidating. The key is to not neglect your investments and to manage them wisely. Then, you can stay calm even when the market is not. Regardless of the swings, the most important thing is to protect your financial security and sleep well at night.
