Four Opportunities

James McGlynn

I FIRST STARTED managing mutual funds a few months before the 1987 stock market crash, and I’ve had to navigate a fair number of market declines since then. My advice: Instead of worrying about how far share prices will fall or how widely the coronavirus will spread, think about the opportunities. I spy four of them.

1. Buy the dip. If you have cash, you might slowly dollar-cost average into the market, so you take advantage of today’s lower share prices. Alternatively, you could rebalance your portfolio from bonds to stocks and take advantage that way.

I don’t think you need to rush to buy—but I also don’t think you should be scared to do so. Unlike 2008-09, it doesn’t appear that the financial system is on the verge of a meltdown. Back then, the housing market helped drag down the economy. This time around, real estate might help prop up the economy, as falling interest rates bring down mortgage rates and make housing more affordable.

2. Refinance. Mortgage rates are usually pegged to the interest rate on 10-year Treasury notes, which ended Friday below 0.8%. That brings me to the second opportunity: With this sudden drop in interest rates, I’ve started the process of refinancing my mortgage. Interest rates have fallen enough that I can swap from a 30-year mortgage to a 15-year mortgage without substantially increasing my monthly payment.

There’s also an opportunity here for retirees. Instead of doing a complicated reverse mortgage, retirees who need cash from their homes might refinance and take out money that way. Why should the U.S. Treasury be the only one to lock in today’s low interest rates?

3. Take tax losses. Before this market correction, your regular, taxable investment account might have only contained gains. But let’s say you own some energy stocks. The sector was weak last year and has gotten weaker with this downdraft, so you might be able to do some tax-loss harvesting.

That might mean selling one energy stock, so you realize a capital loss, and then replacing it with a similar company or with an exchange-traded index fund that’s focused on the energy sector. That way, you maintain your exposure to the energy sector while getting your tax break. Why not buy back the same stock? That could negate the tax loss if you violate the wash-sale rule, which happens if you repurchase the same stock within 30 days of selling it.

4. Roth conversions. You can benefit from lower stock prices by converting part of your traditional IRA to a Roth IRA. For the last five years, I have been doing partial Roth conversions each year. Because of the market decline, I’m planning to convert some stocks that are down this year.

What’s the benefit of doing a Roth conversion during a market downturn? Thanks to lower share prices, I can transfer the same amount of stock from my traditional IRA to a Roth and generate a smaller income-tax bill, because the shares are worth less. Let’s say you have an international stock fund or an energy company whose value is depressed. You can choose how much and which specific holding to transfer to your Roth. There will probably be no cost to do the transaction, especially with the recent slashing of commissions.

Even though the downturn makes a Roth conversion more appealing, keep in mind that the money transferred will count as ordinary income on your 2020 tax return, though the tax bill be somewhat reduced if you’ve made nondeductible contributions in the past. Be sure to make estimated tax payments to cover that tax bill.

James McGlynn, CFA, RICP, is chief executive of Next Quarter Century LLC in Fort Worth, Texas, a firm focused on helping clients make smarter decisions about long-term-care insurance, Social Security and other retirement planning issues. He was a mutual fund manager for 30 years. James is the author of Retirement Planning Tips for Baby Boomers. His previous articles include Gifts That Give BackDanger: Cliff Ahead and Early and Often.

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