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Don’t Play Politics

Adam M. Grossman  |  October 4, 2020

WITH THE ELECTION just a month away, many investors are worried about what lies ahead. Does it make sense to lighten up on stocks now, in advance of the election? I see at least four reasons not to sell:

  • Despite the polls, we can’t be sure what the result will be.
  • As we saw in 2016, nobody knows how the market will react to that result.
  • Even if the market reacts negatively, the effect may be temporary.
  • Thanks to the pandemic, an already unpredictable situation is that much harder to assess.

To be clear, I fully acknowledge that the market could experience a downdraft over the next few months, so you want to be prepared for that possibility. I just don’t think selling stocks is the best way to prepare.

Instead, I would get ready by examining your finances the way analysts would evaluate a bond. They consider three key factors: an issuer’s leverage, its liquidity and its cash flow. That’s a great framework for evaluating our individual finances. After reviewing the questions below, you might decide it makes sense to sell some stocks. But I would only do that for a solid financial reason and not simply in response to the election.

1. Leverage

  • With interest rates at historic lows, have you conducted an inventory of your various debts? Most people focus on their mortgage—which makes sense—but don’t forget about student loans, business loans and even car loans, all of which can be refinanced.
  • Do you have any variable-rate debt? I have seen more than one person refinance an old adjustable-rate mortgage into a new fixed-rate mortgage at a lower rate.
  • Are there any debts that you could extinguish with cash on hand? The issue of whether to pay off debt, even when it carries a low interest rate, gets a lot of airtime in the personal finance world. I would encourage you to look beyond the math and consider the issue from all angles. For instance, it’s advantageous to reduce overhead expenses—and that’s what happens when you pay off a loan. Even if your debts are affordable today, reducing leverage can provide an invaluable margin for error in case of a rainy day.
  • Have you considered putting a line of credit in place, so you have easy access to cash in an emergency?

2. Liquidity

  • I don’t worry about the stock market over the long term, but anything can happen in the short term. If you were to experience an interruption to your income—or if you’re retired and regularly withdrawing from your portfolio—do you have sufficient assets outside of stocks to carry you through a market downturn? This is where a sense of market history can be helpful. In the past 10 years, the S&P 500 has dropped by more than 10% on eight different occasions. In two of those cases, it was closer to 20%, and this year, of course, it was more than 30%. Over that same period, the market has nearly tripled in value, which is great, but the long term is irrelevant if you have a problem in the short term. That’s why liquidity may be the most important of our three considerations.

3. Cash flow

  • Do you have a good handle on your household’s cash flow? For instance, do you have a sense of the breakdown between fixed and discretionary expenses, as well as how much goes each month toward debt payments?
  • Another key element of cash flow is your annual income tax burden. As recent years have proven, tax rules are not written in stone. If the president and Congress are aligned, a lot can change—and quickly. That’s why I recommend diversifying your assets in a way that allows you to hedge your tax bets. This means having at least some assets in each of the three major categories: taxable, tax-deferred and tax-exempt. (This last category includes Roths, 529s and health savings accounts). This is a good strategy regardless of who is elected in November, but it’s especially smart right now. Why? This year, the federal government will run its largest deficit ever: over $3 trillion, or more than triple what it was last year. It isn’t hard to imagine tax rates going up in the future. While some economists believe we can simply print money indefinitely, I’m not so sure—and I wouldn’t be comfortable staking my financial security on a theory that’s new and untested. What can you do? If you aren’t in your peak earning years, consider a Roth conversion in 2020 at today’s historically low tax rates.
  • If your assets are significant, also give some thought to estate taxes. The current estate tax rules are set to expire at the end of 2025. If there’s a political shift in January, that timeline could be accelerated. What to do? Call your estate planning attorney today and ask what steps you should take before the end of the year.

Adam M. Grossman’s previous articles include High AnxietyWhen to Change and Just Say No. Adam is the founder of Mayport, a fixed-fee wealth management firm. In his series of free e-books, Adam advocates an evidence-based approach to personal finance. Follow Adam on Twitter @AdamMGrossman.

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