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Portfolio Reassessment in the Time of COVID-19: Not Your Typical Midyear Review

Many people review their investments once a year. But many things can happen over the course of 12 months that might impact your investment portfolio, and this year it's especially important to review your financial situation as the COVID-19 crisis continues to upend markets.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Midyear checkup for investment portfolio, especially during coronavirus pandemic
5 min read
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Key Takeaways

  • The coronavirus crisis makes it more important than ever to consider a midyear portfolio review
  • Volatile markets may have thrown off your plans, so make necessary adjustments to stay on track
  • The pandemic may also have you rethinking your ultimate goals, so this can be a time to assess any changes

As the bull market charged along, a midyear portfolio checkup often meant ensuring your stock investments didn’t threaten to dominate everything else.

After all, when stocks rally year after year, it can swell your stock portfolio (not a bad thing, necessarily), sometimes forcing you to take a little profit so you’re not taking on more risk than you’d planned. That’s assuming you didn’t want to eventually have the vast majority of your assets in equities.

This year, things feel very different, making a midyear checkup less simple but arguably more necessary than ever.

Investors approach the second half of 2020 with major indices still down significantly and the pandemic dominating headlines. Bond yields are near record lows, and the Fed has pledged to keep rates at zero for however long it takes. The U.S. economy is in turmoil as 20 million jobs vanished in April alone and many states remain shut down. Although the future is never certain, this year takes uncertainty to new depths of … well, uncertainty.

It’s understandable if you feel like a deer in the headlights. It’s normal to freeze up when you face events beyond your control, but the challenge as a long-term investor is to approach your midyear checkup without letting fear get the best of you. It’s important not to trade out of emotions and also not to let uncertainty and overthinking throw you off your game. Sticking to your goals and staying invested may seem more challenging in times like these, but they’re arguably more important than ever.

At the same time, you might need to consider shifting gears as you deal with changing circumstances like a lost job or an employer not contributing to your retirement plan during the crisis.

“This is why having periodic reviews is so important,” said Robert Siuty, a senior financial consultant at TD Ameritrade. “It’s good to assess and reassess a situation, because things happen in life. It’s also good to stress test a portfolio so when you hit an environment like the one we’re in now, you’re not sweating it and you don’t make decisions that can hurt you in the future.”

Rebalancing and Reallocating as Circumstances Evolve

Those of us who are lucky enough to still be working and putting money into retirement plans face plenty of uncertainty. However, if you’re now unemployed or think your job might be threatened, your concern is understandably even greater. Some companies have stopped contributing to 401(k) plans, and many employees have been furloughed or have had to take pay cuts.

If your life and career have been thrown into turmoil by this global tragedy, or if all this volatility occurred right as you planned to retire, a midyear checkup is probably even more crucial. Amid this kind of uncertainty, you might want to reassess your retirement goals and planning.

Even if you’re still working and feel relatively secure, maybe you haven’t looked at your portfolio in a while because you’d rather avoid bad news. Well, midyear is arguably the best time to check, even if it’s painful. Once you lose the butterflies and survey the damage, it’s time to fish out the long-term plan you hopefully put in place at the end of 2019 and see if your current positions still match your original strategy.

For instance, if you’d planned to allocate 60% of your money to stocks and 40% to bonds, it’s possible that’s changed due to the wild market events. Maybe the balance is 50-50 now. If that’s the case, you need to determine if you’re comfortable with this more conservative stance, or if you need to take on additional risk by adding to your stock portfolio and selling some fixed income. Every investor is different, so there’s no one right or wrong way to do this. However, big life events can cause goals to change. 

Before doing anything, consider whether you really need to.

“Some investors feel it makes the most sense to do nothing in times of extreme volatility because that’s when people make the most irrational decisions,” Siuty said. “Emotion gets the best of them.”

Taking a Sector Dive

One way to start your midyear review is to reconsider allocations within your stock portfolio. Since the March lows, some sectors like Information Technology and Health Care have thrived, while Financials, Industrials, and Materials haven’t recovered as much. Small caps haven’t performed as well as large caps, and European stocks are doing much worse than U.S. stocks year-to-date. Stocks in China, however, have been outpacing U.S. stocks since the start of the year.

If the tech rally has overexposed you to that sector versus your original plan, and you actually have the profits, it could be time to consider some profit-taking to get into balance. If you find yourself underweight in a sector or market because it’s struggling, consider whether to use the lower prices as an opportunity to step in.

This is one of the toughest things to do, because when you’re losing money, putting more in might feel like digging a deeper hole. However, if you believed in the sector or stock originally, ask yourself if that’s changed now. If you still have faith in the underlying fundamentals, it might be time to buy at lower prices.

Before doing that, it’s important to determine if the current market and economic patterns still justify the investment. Does a particular company have a cash flow and balance sheet that position it well for long-term recovery versus some of its peers? Some very good companies have been carried down with others in their sector by the prevailing bearishness, even when they might not deserve so much punishment.

On the other hand, if you own stocks or corporate bonds of a company that appears to be in real trouble and possibly facing bankruptcy, holding on all the way to the bottom doesn’t make much sense. Try to be objective and not let emotions guide you as you make the hard choice to fling away some of the losers.

Any losses from selling stocks, bonds, or mutual funds can be used to offset taxable capital gains, a process called tax-loss harvesting. The size of the potential benefit from tax-loss harvesting depends on your income level and the amount of your short- and long-term capital gains (minus any current losses that you may have already realized or any losses carried forward from other years). 

“If someone is looking for opportunities in a down market and feels they have to do something, tax-loss harvesting sometimes makes the most sense,” Siuty said. “You can capture a loss and use it to offset future gains. In an environment like this, no one is immune to losses.”

Another thing to consider is how the Fed’s zero interest rate policy might affect your investing strategy. Rates were already falling late last year, but on January 1, few, if any, would have expected years of zero rates ahead. Now that appears to be the case, judging from the futures market.

Low rates can affect how investors might want to approach the fixed-income market. Suddenly, longer-duration fixed-income products can start to look a little less compelling. The so-called “short end” of the yield curve, meaning bonds with durations on the closer side of the time spectrum, might get a little more love. That’s why you might want to take this midyear opportunity to revisit your fixed-income strategy.

What’s Changed Besides Everything?

For those of us who’ve lost jobs due to the pandemic, things are probably far worse than we thought they’d be. For others, the pandemic is just one of many life changes in 2020. Working from home is the new normal for a lot of us, but is there also a new baby on the way? Are you getting closer to having college payments? Is an elderly parent in need of your care? Are you planning to retire soon?

Pandemic or no pandemic, all these things can lead to decisions about where to invest your money. Maybe you need to be a bit more conservative because you’re saving for a major life event that’s around the corner and you don’t want to ride out the wild emotions and extremes of the stock market. This could mean adjusting your balance for more fixed-income exposure or even taking some money out of the markets and putting it into cash.

Another question this year is what to do with CARES Act stimulus checks. Many people received $1,200 back from the government recently. Although this instant money might offer some relief, the messages about what to do with it are mixed. Of course, bills come first—mortgage, rent, and utilities. But then what? Some ideas include using the money to shore up your emergency savings, pay down high-interest debt, or invest in a beaten-down stock that you feel has suffered too much punishment.

Tax Man Delayed, But Not Forever

Despite the pandemic, taxes remain a fact of life as you go about your midyear review. The government has pushed back Tax Day to July 15 and has considered even more delays. Keep an eye on the news for any change in the IRS deadline, but don’t let the extension become an excuse to procrastinate.

Familiarizing yourself with any changes to tax rules now will give you time to update your tax and investment strategies before the tax deadline approaches, whenever it might actually be. You may want to contact a tax professional to discuss your personal situation. 

  • Tax brackets and rates. Your tax rates depend on your tax bracket, which is determined by your income level. If you expect to have more money in your pocket than you did last year, you might want to use the extra cash to build your emergency savings fund, pay down debt, or put it toward another goal like retirement. On the other hand, if you expect to pay more in taxes, you might decide to contribute to a traditional IRA instead of a Roth. You may be able to deduct the contributions and potentially lower your current tax bill. For 2020, IRA maximum contributions for individuals are $6,000 ($7,000 if you’re 50 or older). The maximum contribution for a 401(k) is $19,500, up from $19,000 last year. The catch-up contribution limit for employees age 50 and older who participate in these plans increased to $6,500 in 2020, from $6,000 in 2019.
  • Standard and itemized deductions. The standard deduction for couples filing jointly increased in 2020 to $24,800 ($12,400 for individuals). Calculating the charitable donations you’ve made so far in 2020, as well as any deductible expenses you’ve incurred, may help you see where you stand relative to the $24,800 threshold. You can then decide if you want to take any steps to potentially boost your itemized deductions before December 31.
  • 529 plans. Although they’re still called college savings plans, 529s are no longer just for college. Under current tax law, you may be able to take out up to $10,000 a year tax-free from a 529 plan to cover K-12 tuition expenses for private and religious schools. Some states still do not recognize these new federal tax benefits, so consult a qualified tax advisor about your personal situation and how these changes may affect you. This may also be something to consider depending on the educational needs of your loved ones. Of course, college is a huge question mark right now in the wake of COVID-19, as it’s unclear when colleges will reopen.

A midyear portfolio checkup can help you determine other types of changes you might need to make. You may want to:

  • Reprioritize your savings goals
  • Purchase life insurance
  • Start a college fund
  • Update your will and beneficiary information

If you’re a TD Ameritrade client, consider kicking off your review by logging in and checking your account. It’s also a good time to name or update a beneficiary to ensure your assets are directed to the people or charities you choose. You may also want to consider scheduling a goal-planning session with a TD Ameritrade Financial Consultant who can help you evaluate your existing financial plan or work with you to create one that’s tailored to your needs. 

Depending on your investing style, you may choose to do the review yourself, or you may want to work with a TD Ameritrade Financial Consultant who can walk you through the process and help you assess your investments.

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Key Takeaways

  • The coronavirus crisis makes it more important than ever to consider a midyear portfolio review
  • Volatile markets may have thrown off your plans, so make necessary adjustments to stay on track
  • The pandemic may also have you rethinking your ultimate goals, so this can be a time to assess any changes

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