This is a guest post by Jeff Rose, who is an Illinois Certified Financial Planner(TM) and co-founder of Alliance Investment Planning Group. Jeff is also the author of Good Financial Cents, a financial planning and investment blog. If you like what you see here, please consider subscribing to his RSS feed.
Does anybody feel like the 2008 stock market crash has been one of the worst ever? Unfortunately, the crash in 2008 was the first collision and now 2009 just rear ended you when you thought the wreck was over. If you feel that the the market turmoils are like a severe car wreck, it leads us to wonder how to rehab our way back from such a serious injury.
As you may know, effective rehab is simple and repetitious. The improvements are almost imperceptible, and the real benefit is only recognizable in hindsight. It may take six, twelve, or even more months, but eventually that limp you had will be just a memory.
For those that feel like the recent market crash has left you with more than just a simple limp, here are some pointers that can keep you going as the market attempts to figure itself out.
Continue Funding Your IRA and 401(k)
Yes, I know that sounds insane considering how ugly the market is right now, but you have to have some faith in the U.S. economy. Just because I’m suggesting that you fund your retirement accounts doesn’t mean you have to put in all in the market. You will want to at least fund your retirement accounts to either get the 401(k) match or the tax free savings of the Roth. Even if it’s invested in bonds right now, you’ll be able to transition to stocks later on when you feel more comfortable.
Make Roth Conversions Now or in 2010
If you’ve been wanting to get money into a Roth IRA, now might the opportunity. If your AGI is below $100,000, you are able to convert traditional IRA’s and old 401k’s this year. If not, you’ll have to wait until the 2010 conversion event. Why is this time to do it? You’ll pay less tax on the conversion because most likely your account balances are down (whose isn’t, right?) and you’ll have less of a tax liability on the amount to convert. If you have to wait until 2010, the one upside is that you’ll be able to spread the tax over a two year period.
Diversify Asset Classes
Is diversifying really dead? There’s no question that even a well-diversified portfolio took a substantial hit over the past 6 months. But what about alternative asset classes? Managed futures returned double digit gains last year, showing that only do we need to diversify with stock and bonds, but we also need to consider non-correlated assets. One thing that you must consider is that although alternative assets classes can reduce risk in a portfolio, that doesn’t mean they decreases volatility (ups and downs of the market). That’s a common misconception with most investors that needs to be known.
Review Your Retirement Plan
Face it, things change and you have to adapt and overcome. If you had a well thought out retirement plan last year, it needs to be revisited. A lot has changed in a short amount of time and you need to act accordingly. It’s not time to panic, but you need to be proactive in what is going on around you. Don’t let an opportunity pass you by that could make a serious impact to your retirement plan.
Put Money to Work
I know that this seems almost impossible nowadays. The stock market loses a hundred points every other day it seems and savings account interest rates are dropping just as fast. But even still, there are opportunities to take advantage of.
If your 401(k) has a match, keep contributing and get your free money. If you have a credit card with a 8.9% APR (just as an example), pay it off and you just made 8.9% on your money. Maybe you have a significant amount in your checking or savings accounts and you’re only earning 0.25% (yes, I’ve seen it that low). If so, consider moving your money to an online savings account (just make sure that they are FDIC insured). It may only pay you 2%, but you’ve still increased your payout by 8 times.
It all sounds simple, but these are the kinds of simple things that we can do to get ourselves back on the road to financial health. What about you? What are you doing to recover from the crash?