Financially Speaking: The Gift of Locking in Profit
It’s that time of year when warm, fuzzy thoughts drift to peace on Earth, goodwill to men, Christmas carols and holiday cheer. It is also time to reflect on 2019 and where we are headed.
As I write this today, the S&P 500 is up 19% year-to-date entering the fourth quarter. This represents the best performance for the first three quarters since 1997. That said, it is only up 3.72% for the past 12 months. The economy seems to be holding its own. There are many geopolitical events that could affect the markets, including the tariff war between China and the U.S., interest rate concerns (the Fed lowered rates twice in the last quarter), and European bonds that are paying negative yields. We also had the markets tank in mid-August. Investors panicked when short-term bonds were paying higher interest rates than longer-term bonds. They call this scenario the “inverted yield curve.” Since 1955 every U.S. recession has been preceded by an inverted yield curve. Don’t panic, many times this happens months or even years before a recession. That being said, consumer confidence is still holding on, but it is dwindling.
What a crazy year. Well, maybe not for all of us, but certainly for those living in Washington. With everything happening now, my mind is drifting back to the ’90s, particularly the classic holiday “Seinfeld” episode, “The Strike.” The House of Representatives has filed articles of impeachment against President Donald Trump. It is a sad state of affairs for our country, but it got me imagining that Congress and the president have celebrated the Frank Costanza holiday tradition, Festivus for the Rest of Us. Instead of the national Christmas tree in Washington on the White House lawn, maybe they’d put up the unadorned Festivus pole, just a bare aluminum pole. Then everyone in Congress would be invited to participate in the Airing of Grievances (they actually are), which is the opportunity to tell others how they and anything else disappointed you in the past year. Another customary practice of Festivus is the Feats of Strength, where the head of household (in this case, Trump) must be pinned in a wrestling match. Can’t you see the members of Congress lining up to see if they can pin the president? Funnier yet, would the Speaker of the House be trying to pin the president? Oh, we can dream, since it is the holidays.
I would like you to give yourself a great holiday gift this year: profit. With the markets near their highs, it is the perfect time to take some profit. Look at how you are invested now, and if it still makes sense. Over the past 10 years, since the end of the Great Recession, the stock markets have enjoyed a great run. If you were taking more risk than you might have been comfortable with over the past 10 years, you have probably been rewarded with very good returns. But with most signs pointing to a slowdown and possibly a recession, does it make sense to hold pat? Probably not.
Review your investments and rebalance them to match your risk comfort zone, which is nothing more than how much risk are you comfortable with to meet your financial goals. Chances are, your risk has changed over the past several years, but maybe you haven’t changed the risk in your investments. When rebalancing your portfolio, look first at your retirement accounts: 401(k), 403(b) and IRA. Any changes that you make in your retirement accounts will not be subject to current income tax, since they are tax-deferred investments. You only pay taxes when you take a withdrawal. Next, look at your taxable investments (individual and joint investment accounts) to take advantage of selling any investment that might provide you a loss. When looking at your investments, whether you have a loss or gain will depend on your cost basis. The cost basis is what you paid for the investment plus any capital gains and dividends they paid. You can actually have a higher balance than when you purchased the investment but still be able to sell it and take a tax loss. The tax treatment will depend on the length of time you held the investment. It will be considered short-term loss if you held it less than a year. If you are concerned about the tax treatment of any sales, contact your CPA or the investment company, and they can help you.
We are sitting down with our clients and discussing this exact thing. We are talking about reducing the risk in their portfolios. Although we discuss risk on a regular basis, it makes sense now with the markets up for the year. For our clients who are retired or approaching retirement, we talk about where they are financially. Does it make sense for them to keep the same percentage they have invested in stocks or should they reduce risk, build up their cash and bond positions? Remember that bonds (high quality) begin with “B” since they are boring. When the markets go down, boring is good.
Many of our clients are getting antsy with all of the negative news about the economy. They are happy to take some risk off the table. For our clients who have been holding 50% stocks, we are discussing moving them down to 40% equities. The idea is to take profit now, and if and when the markets correct, we can always move that 10% or more back into the market.
For many who do their own investing, this is one of the most difficult things to do. There is a lot of emotion involved. They are afraid when they sell a stock that it might go up. The same is true for all of those who sat on the sidelines, holding a lot of cash the past several years, and did not participate in the stock market run-up. Basically, they become paralyzed and can’t make a decision either way.
So, for this holiday season, review and rebalance your portfolio. Give yourself the gift of locking in profit.
Now that you made changes to your portfolio, relax and enjoy the holidays. I hope you and yours have a wonderful holiday season and that 2020 is one of good health, happiness and prosperity.
Fred Dunbar, CLU®, ChFC®, RFC®, AIF®, is President of Planning Directions, Inc., a registered investment adviser, and Common Cents Planning, Inc. He also offers securities through Commonwealth Financial Network, member FINRA/SIPC. Advisory services offered through Planning Directions, and fixed insurance products and services offered by Common Cents Planning, are separate and unrelated to Commonwealth. Fred may be contacted at 800-647-0762, by e-mail at fdunbar@commoncentsplanning.com or by mail at 239 Baltimore Pike, Glen Mills, PA, 19342. He’s always happy to meet with you “down the shore” at 6606 Central Avenue N. Sea Isle City, NJ. 08243.
