6 Actions Every Investor Should Take Now
Just reading the headlines is enough to make you gnash your teeth. Investors are anxious and with good reason.
Sure, the bull market is still alive. But stocks are overvalued. Sovereign debt overseas has reached unsustainable levels. America is bitterly divided. And if President Trump fires special counsel Robert Mueller (as appears likely), the country will face a constitutional crisis. Those are just a few of the risks we face as 2018 looms on the calendar.
Just remember this: smart investors never run for the hills. They stand their ground and take action.
Despite the myriad global risks, we’re not predicting another Great Recession or protracted bear market. We’re not prophets of doom, preying on your worst fears. Throughout history, humankind has survived even worse challenges and eventually prevailed. Global capitalism, and with it investment opportunities, will survive over the long haul.
That said, we live in uncertain times. You must take common-sense measures today, to ensure your family’s safety and financial security. Below are six simple and easy measures that will protect your portfolio and net worth.
Here’s the sweetener: many of these measures don’t cost a dime, or they actually save money.
1) Use Stop Losses When Buying Stocks
One of the most widely used devices for limiting the level of loss from a dropping stock is to place a stop-loss order with your broker. Using this order, the trader will pre-set the value based on the maximum loss the investor is willing to tolerate.
If the last price drops below this fixed value, the stop loss automatically becomes a market order and gets triggered. As soon as the price falls below the stop level, the position is closed at the current market price, which prevents any additional losses.
A trailing stop and a regular stop loss appear similar as they equally provide protection of your capital should a stock’s price begin to move against you, but that is where their similarities end.
The “trailing stop” provides an advantage over a conventional stop loss because it’s more flexible. It allows the trader to continue protecting his capital if the price drops, but when the price increases, the trailing feature becomes active, enabling an eventual protection of profit while still reducing the risk to capital.
Over time, the trailing stop will self-adjust, shifting from minimizing losses to protecting profits as the price reaches new highs.
2) Diversify Among Stocks and Sectors
Don’t put all of your eggs in one basket. Also be sure to diversify across sectors.
Investors often punish themselves as much as the market does. Despite the compelling case to diversify, many investors hold portfolios with assets concentrated in relatively few holdings. This common failure has its roots in lack of knowledge and just plain laziness.
3) Spread Your Money Among Several Asset Classes
Don’t just stick to components of the S&P 500 or the Dow Jones Industrial Average. Spread your portfolio among value, small-cap, large-cap, growth and dividend stocks.
4) Spread Your Investments Geographically
Don’t simply focus on specific country or regional funds, or on emerging markets. The best course of action is to diversify throughout the world through international index funds.
5) Set A Specific Retirement Date
It’s important to have a specific date in mind for when you plan to retire. This should be based on multiple factors, not just your investment portfolio.
If you enjoy your job, would you prefer to keep working (and saving) a little longer? It’s tough to get back into the working world once you’ve left it behind.
Are you slated to get a defined-benefit pension from your job? Are you fully vested already? If so, you may not need to make significant changes in your investments.
When are you eligible for full Social Security benefits? This varies depending on when you were born. If it was in 1960 or later, you will have to wait until age 67. If you start to collect your benefits earlier, your monthly payments will always be lower than if you had waited.
Then make an honest assessment of your future spending needs. Will you sell your current home and move to a lower-cost area? What are the tax consequences of this? After you have a specific target in mind, you can start formulating your strategy for getting there.
6) Create a Plan for Drawing Living Expenses in Retirement
When you draw on your investment portfolio for living expenses in retirement, keeping your tax bill down will give you more to spend. A tax dollar saved is as good, maybe better, than an investment dollar earned.
It’s usually best to let your wealth compound tax-free for as long as possible. The greater variety of accounts you have, the more opportunities you’ll enjoy to diversify your tax savings. This can help you keep your tax bracket down in retirement.
As a general rule, you should withdraw cash from taxable accounts first. Later on, focus on tax-deferred accounts such as traditional Individual Retirement Accounts (IRAs) and annuities.
Leave accounts with tax-free withdrawals for last. An example of such an account is the Roth IRA, which allows taxpayers, subject to certain income limits, to save for retirement while allowing the savings to grow tax-free. Taxes are paid on contributions, but withdrawals, subject to certain rules, are not taxed at all.
Early in your retirement, converting currently taxable assets to spending money makes sense because little or no additional tax likely will be due.
First, take dividend income and any mutual-fund distributions in cash instead of reinvesting them. You pay tax on these payouts even if you reinvest them, so this step won’t cost you anything.
Next, sell investments with no cost basis or the highest basis and therefore no or low taxable gain.
Assets with no cost basis include money funds and bank CDs as well as Treasury bills and various types of bonds held to maturity. Bond funds likely carry a high basis compared with your sale price, and therefore low tax liability.
Ideally, you’ll be more passive in taking long-term gains and more active in “harvesting” your tax losses.
Continuing to hold profitable, long-term investments in a regular account is, in effect, a form of tax deferral. If you sell losing investments, you offset your tax liability on any gains you’ve taken with other investments.
Letters to the Editor
“I’m worried that my online accounts could get hacked. What can I do?” — Melissa J.
The incessant news reports about serious cyberattacks would be monotonous, if the stakes weren’t so enormous. These attacks are occurring with greater frequency and brazenness, with no regard for national borders.
Increasing numbers of technology companies are notifying users of their online services if they have been victims of state-sponsored hacking attempts. But there are cybersecurity measures that you can take as an individual, right now.
Five years ago, staying safe online meant not giving out passwords to strangers. Today, with data breaches assaulting systems regularly, online security has taken center stage for both companies and consumers.
Among the steps you can take: clean up your social media practices by not “friending” or connecting with unknown people; don’t click unknown web sites that have appeared in your inbox via unsolicited emails; avoid using debit cards online; strengthen password protection; use security software; and never respond to Internet ads for anti-spyware programs, because they may actually open up spyware.
Are there other steps you’re already taking to protect your wealth? Share them with us: firstname.lastname@example.org
John Persinos is managing editor of Personal Finance and chief investment strategist of Breakthrough Tech Profits.