Eight Financial Strategies to Consider During the COVID-19 Shutdown of 2020

By Justin J. Carbonneau

The recent declines in the market along with the overall shutdown of the economy may have many investors feeling a little hopeless and paralyzed—all completely normal feelings in times like these. However, periods like this also present opportunities for those who have the self-confidence to look closely at certain parts of their finances and overall financial plan. To that end, I’ve come up with 8 strategies that could improve short- and long-term financial outcomes for some investors.

[1] Tax Loss Harvesting

Tax loss harvesting is a technique that involves selling stocks, ETFs or mutual funds in order to book a loss. This often takes place at the end of the year, as investors look to gather as many losses as possible to offset capital gains. The recent market decline offers investors an opportunity to harvest those losses either on positions they may not want to hold anymore or to generate a loss even on a position they intend to hold.

For example, suppose you purchased Exxon Mobil a year ago at around $80 a share. Today, the stock is valued at around $43 dollars, so you could potentially harvest a near 50% loss if you sold the stock now. However, perhaps you want to hold Exxon Mobil for the long run. One strategy could be to sell the stock, book the loss, re-allocate those proceeds to an ETF that holds Exxon Mobil (say the Energy Select Sector SPDR Fund (XLE), where it accounts for 23% of the fund), wait 30 days so you don’t violate the wash sale rule and then buy back into Exxon Mobil. Of course, if during this time the stock dramatically outperforms the XLE then you will have missed those gains, but a tactical tax loss harvesting strategy like this can be useful during periods of dramatic declines like we’ve seen so far this year.

[2] Roth IRA Conversions

Periods of market declines also present investors with the opportunity to convert their regular IRA to a Roth IRA. Remember, regular IRA contributions are tax deductible for the year you made the contribution but when you withdraw them, those distributions are taxed and treated as income. Roth IRAs, on the other hand, don’t allow for the tax deduction on contributions so they don’t lower your reported income like a regular IRA, but the money is not treated as income and therefore is not taxed when you take it out. Furthermore, since an investor who decides to “convert” a regular IRA to a Roth IRA has to pay tax on the amount that converts, a declining market environment means that both the conversion amount and the resulting tax amount will  be lower. In other words, market declines present an opportunity to convert to a Roth IRA at depressed asset levels, thus resulting in a lower tax liability than if you converted before stocks declined.

Schwab has a Roth IRA Conversion Calculator on its site you can use to determine if a Roth conversion makes sense for you.

[3] Waiting on Your Required Minimum Distribution (RMD) or not taking them at all

Many investors take RMDs. Some need RMDs to live off of, while others take because they are forced to at the require minimum distribution age.

Timing of RMDs could effectively be a form of market timing, so you need to approach this with caution. That said, for certain investors it may be a strategy worth considering.  As part of the Coronavirus Aid, Relief and Economic Security (CARES) Act, RMDs for 2020 have been waived. The idea behind this is that because investors’ portfolios have seen significant declines, allowing them to forego RMDs this year means they don’t have to take the distributions, which would be a larger portion of their portfolio today. This gives the investments time to recoup their value over the next 1.5 years. The Schwab Center for Financial Research had a good summary of this (click here).

[4] Refinancing

The chart below shows the long-term chart of 30 year fixed mortgage rates. While interest rates may not be at all-time lows, they are certainly close and anyone with a strong credit score and equity in their home could be saving on the long-term interest payments if they have a mortgage with an interest rate of over 4.5%. Obviously, fees and the length of the mortgage will play a role in the cost/benefit on any refinancing decision, but it’s something individuals should be paying attention to.



Source: https://fred.stlouisfed.org/series/MORTGAGE30US

[5] Updating Your Beneficiaries

The number of people effected by the health threat posed by COVID-19 continues to grow. Even for those who don’t become seriously ill, there are wide ranging impacts from this virus. Times like these offer a not-so-gentle reminder to make sure your affairs are in order, which includes ensuring that the beneficiaries of your IRAs are current. Life events like marriages, divorces, the birth of children or other changes can impact  decisions regarding where you would like your retirement assets to end up, so it’s important to keep beneficiary documentation up-to-date.  

[6] Rebalancing

Investors who maintain asset allocation strategies can be opportunistic in both up and down markets. The chart below shows how a 60/40 allocation between stocks and bonds would have drifted over the past 10 years due to the relative outperformance of stocks over bonds. The 60/40 stock/bond allocation would have essentially become an 80/20 allocation at the end of 2019:

As the table below shows, as the allocation drifted more towards equities, the volatility and risk measures also increased. As a result, in a year like we’re having so far in 2020, with stocks down materially, an unadjusted allocation heavier in stocks would have seen more downside than if the portfolio was brought back to 60/40 at the beginning of the year.

Source and disclaimers: https://www.calamos.com/blogs/investment-ideas/heres-one-way-to-rebalance-before-the-market-does-it-for-you/

The example above illustrates one way to rebalance in an up market, but there is also an opportunity to rebalance in a down market. Say, for instance an investor brought their portfolio back to 60/40 on 12/31/2019. At one point just a few weeks ago, stocks were down nearly 35% and bonds were up such that the 60/40 would have been more like 45/55. An investor who wanted to take advantage of that dislocation of equities could have adopted an opportunistic rebalancing approach and adjusted the portfolio back to the 60/40 allocation.

The overarching point is that these asset classes can drift materially in both the short and long run. Investors looking to benefit from asset allocation should be mindful of this.

[7] Consider Making a Qualified Charitable Distribution (QCD)

Fidelity has a good overview on QCD’s in its article, “Qualified Charitable Distributions (QCDs): When planning your IRA withdrawal strategy, you may want to consider making charitable donations through a QCD”. Here is an excerpt:

“A QCD is a direct transfer of funds from your IRA custodian, payable to a qualified charity. QCDs can be counted toward satisfying your required minimum distributions (RMDs) for the year, as long as certain rules are met.

In addition to the benefits of giving to charity, a QCD excludes the amount donated from taxable income, which is unlike regular withdrawals from an IRA. Keeping your taxable income lower may reduce the impact to certain tax credits and deductions, including Social Security and Medicare.

Also, QCDs don’t require that you itemize, which due to the recent tax law changes, means you may decide to take advantage of the higher standard deduction, but still use a QCD for charitable giving.”

[8] Investigate & Understand the CARES act

As mentioned above, investors can forego taking their RMDs this year due to the CARES act, but there are other provisions in the act that are important for investors with retirement accounts (i.e. IRAs, 401ks) to understand. Josh Brown of Ritholtz Wealth Management wrote a good summary article for CNBC.com. The bottom-line: Individuals with retirement accounts that have been negatively impacted by the situation have more options for their retirement assets now that may be worth considering.

We’ll look back on this period years from now and remember how much the world changed as a result of COVID-19 and the related shutdown. While it’s impossible to predict what all those changes will be, the one thing we can say for sure is that those investors who maintain a long-term perspective, discipline and patience by carefully considering thoughtful adjustments and intelligent changes to their investments and finances will probably be fine over time.

Photo: Copyright: 123rf.com / gajus


Justin J. Carbonneau is VP at Validea & Partner at Validea Capital Management.
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