There are many reasons having a financial plan is valuable, but maybe the most significant is that it can help you understand how to react to the latest negative headlines. When I say financial plan, I mean you have clearly articulated your values and goals and you’ve built a reasonable plan to get there. Out of that process an investment plan is created, stress tested, and implemented in a way that gives you the greatest likelihood of meeting your goals.

Any well-designed financial plan will consider two important realities. First, the market will go up and down, sometimes a lot. Second, we don’t know when the market is going to go up or down. Any attempt to guess and trade accordingly amounts to something known as market timing. And that, unfortunately, is a fool’s errand. Studies and historical returns show few people have the skill to guess which individual stock or which fund manager will outperform consistently over time.

Instead of trying to time the market based on Wall Street forecasts, focusing on the financial plan is much more likely to increase our chances of financial success. Every time you’re tempted to buy an individual stock, make frequent changes to your investments or have an emotional reaction about a drop in the market go back to your financial plan.

Rebalancing the Portfolio

While a financial plan is built upon the understanding that there are going to be good years and bad years, and that nobody can predict what the future will bring, rebalancing regularly is a sound investment strategy to limit risk and to buy low/sell high

When an investment plan is initially created several factors are considered: your income, age, and your financial goals, among other things. Your portfolio should be built based on your unique goals and incorporated some market-return assumptions. The resulting portfolio’s allocation balances the potential returns you’ll need to reach your goals with the risk of potential losses you may incur.

The purpose of rebalancing isn’t to score the maximum returns possible. The purpose is to manage risk, so your nest egg might fluctuate less in the event of a downturn and force the portfolio to buy investments that have recently dropped. Historically, as the percentage of equities in a portfolio has increased, so have the portfolio’s returns. But there’s a trade-off: the higher the percentage of stocks, the greater the risk of losing money.

Tax-Loss Harvesting

One positive action that can be taken in taxable accounts during market downturns is to check for opportunities to tax-loss harvest. This is when an investment has gone down in value since it was purchased and you sell that investment to realize a loss. The loss can be used to offset capital gains and in some cases it can be used to reduce income.

Usually, a good practice is to immediately buy a similar type of investment since we can’t time when that type of investment will start going back up. Buying the similar investment ensures you stay invested but you still take advantage of the tax-loss.

While tax-loss harvesting cannot erase the sting of selling at a loss, it can benefit during tax time by converting these market losses into tax-savings. Just remember, this strategy is only available in non-retirement accounts.

Using these strategies as part of your financial plan can have long-term positive affects towards your financial goals. Remember, having, using, and updating your financial plan can help you lower your stress, spend more time on things that are important to you and gain confidence that you are on the right path to financial success.

Roth Conversion: The 10 to 15 years leading up to retirement are a critical time to manage your tax situation for the 20+ years in retirement. If you have been saving inside a Traditional IRA or 401(k) at age 72 you will have to start taking Required Minimum Distributions (RMDs). Depending on the amount saved in these accounts you may have to pay high taxes on those required withdrawals.

Now, we all have to pay taxes but you shouldn't pay more than necessary. With that in mind it is worth considering converting some of your Traditional IRA or 401(k) money into a Roth IRA.

With a Roth Conversion you pay taxes now on the money you convert and then in retirement money withdrawn from the Roth is tax free. This is a great consideration if you are in a relatively low tax bracket during some working years, in the time between retirement and age 72 or if you believe tax rates will be going up in the future. Ideally, when conversions are made you will remain in the same tax bracket for the money being converted thereby reducing future RMDs and lowering your taxable income in retirement.

One major point to remember is that Roth conversions may be made on portions of your IRA or 401(k). It does not have to be made on the entire balance of the account. In coordination with a CPA and the financial calculations and tools I use we can create a Roth conversion plan with the goal of tax efficiency.

Build a Reserve Account: Unfortunately, for a lot of people, when businesses were told to close due to the virus and they no longer had a job they didn't have savings to help them through this period. While federal and state government provides some help through unemployment payments and other crisis programs we see that there may be delays to receiving that money or some may not qualify.

A better plan would be to have a savings account with 3 to 6 months of expenses available. This provides great peace of mind during times like these and it allows a person to be self-reliant.

The only way to know how much needs to be saved to cover 3 to 6 months of expenses is to have the dreaded b-word, "Budget." People may hate the budget process but a little pain upfront brings increased security for times like these.

A great option for a reserve account is to use an online-savings account that pays you interest at a much higher rate than most local banks.

Increase Contributions: The three most important factors to building wealth are a mix of time, contributions, and compounding interest.

While we may be in the early stages of a recession and troubling times for the stock market, eventually things will get better and there will be a great opportunity to build wealth again. It is important to use these down times as opportunities to put more money in investments because you are able to buy more for less.

Use your budget to also help fine tune how much more money to put into investment accounts each month. Whether that money goes into an IRA, Roth, 401(k), college savings or taxable account depends on your unique circumstances and your goals.

Consider this scenario from Business Insider that illustrates the importance of time, compounding and the amount of contributions:

Start at Age 25, save $300 a month
Start at Age 35, save $300 a month
Start at Age 40, save $600 a month
* 5% compounding interest for each person

When each person retires at age 65 the person starting at age 25 ends with about $460,000, the person starting at age 35 ends with about $251,000, and the person starting at age 40 but with double the contributions accumulates $359,000.

If you’re ready to start making smart decisions with your money and get clear on what you want your money to do for you and your family contact me, Christopher Peterson, CFP® today.

Christopher Peterson is a Certified Financial Planner™ professional, NAPFA member, fee-only financial advisor and provides fiduciary advice to his clients. Peterson Wealth Advisory was established in 2008.