5 Steps to an Effective COVID Portfolio


We’ve all been impacted by COVID-19. We have learned a lot about the virus, ourselves, and our economy over the last couple of months, but there is still a lot that remains unknown. While we can be certain that as our society opens back up there will be an increase in the number of cases, we do not know how our government will react, and, in turn, what will happen to the economy or the stock market at that time. Despite this huge question mark, there are still some actions that investors can take to help mitigate whatever consequences the future holds.


1. Tax Loss Harvesting

Whenever the market goes down, there is opportunity. One of those opportunities is to sell stocks at a loss in a taxable account. While nobody enjoys seeing their life’s savings shrink by 30%, if you sell and redeploy your assets, you can be looking at big tax savings now and potentially in the future. If you bought a $100,000 position that shrank by 30%, you could collect $30,000 of losses and use it to offset some incentive stock options (ISOs) that you’ve been meaning to offload. That could represent over $10,000 in tax savings.

However, there are caveats. It’s usually prudent to reinvest the sale proceeds immediately so you don’t miss any market movements, but you need to be careful. You cannot invest into a position that is substantially similar to the underlying security that you sold at a loss. What does “substantially similar” mean? Whatever the IRS says it means when they audit you. It’s case by case, so be sure to ask your tax adviser. Also, you can’t repurchase the stock for 30 days before OR after. Your loss will be suspended and added to the basis of the new stock.


2. Rebalance

Many investors have (or should have) targets on their portfolio. Typically, this involves a mix of bonds and stocks. When the market has major movements like last February and March, that mix gets out of balance. When the market is tanking, the bonds usually perform the best and can quickly become over-weighted in the portfolio. It’s tempting not to buy more stock when this happens, but it is the best thing for the portfolio. By selling the bonds, you can buy stocks at a relative low (the old buy low and sell high idea).

This isn’t to say that the market won’t go any lower. It may continue to drop like a stone, and all of the new stocks you purchased may end up being at a loss in short order. That’s okay; it’s just another buying opportunity! For long term, model-based investors, dips are great because they let you invest more when the market is low.


3. Dollar Cost Averaging

Were you sitting on cash when the market dipped? Or maybe you reacted too quickly and pulled the plug on your portfolio and are now swimming in cash? That’s okay! You can still make a good decision to start investing. Many investors in cash during volatile times find it difficult to put their money into the market because of all the uncertainty. That is completely normal, especially when we are finding new, ominous records every day to shatter for unemployment and GDP.

Dollar cost averaging is a disciplined way for investors to make their way back into the market. It’s an easy process: take the total amount you want to invest and divide it up over six months to a year. Then, ratably invest that money over the chosen time horizon. If stocks dip halfway through, that’s fine; you are still going to get half of your money into the market at lower prices. If the market rises, then at least the first dollars you invested were used to purchase stocks at lower values.


4. Don’t Bail

When things seem at their darkest, that’s when investors tend to want to liquidate their portfolios and be in cash. However, this is usually the worst time to do so. Investing is an emotional sport, and it requires a lot of patience. If you find yourself tempted to move to cash, wait. Let the market come back, and when the portfolio recovers then move your portfolio to something less risky, so that the next time we crash you don’t keep yourself up at night.

By missing out on the recovery, you could turn what would otherwise be gains into losses. According to JP Morgan, an investor in the S&P 500 from 1999 to 2018 would have had an annual rate of return around 5.6% if they did nothing during the tech bust and Great Recession. If they missed the 10 best days during that 20-year period of time, their return goes to 2% per year. If they miss the 20 best days, then it’s -0.3% per year. Staying the course almost always makes the most sense.


5. Find a Financial Advisor

Investors do better with financial advisors, rather than going it alone. Dalbar conducted a study in 2017 that found while the S&P earned 11.96%, the average stock investor earned 7.26%, or a 4.7% underperformance. Similarly, the bond market returned 2.65%, while the average bond investor got 1.23%, which is 50% less than the benchmark (ouch!).

A financial advisor is going to keep you on track and should not make emotional decisions regarding your portfolio. This should result in  better returns, and in most situations is well worth the cost of hiring the financial advisor. Of course, make sure you know how your advisor is compensated, and always compare costs.  


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