Reacting badly to bad national economic events can turn a challenging situation into a devastating one. When troubling headline news comes your way, consider these tips before making financial moves.
- Don’t be an average investor. Economists have noted that even in good times average investors usually fail to benefit fully from a market upswing. The reason: not staying invested for the duration of the cycle. Average investors tend to bail out when the future looks troubling, in essence “locking in” losses. Good investing techniques can be as much about mental toughness as about financial acumen.
- Focus on costs. Periods of economic uncertainty are a good time to focus on costs, especially in a low-return environment. Make sure you’re not overpaying for fund management or sales commissions. And be mindful of tax costs, which can have a negative effect on overall returns. If you decide to sell a stock in a taxable account, consider choosing one you have held for more than one year to qualify for the long-term capital gain tax rate. A market downturn might provide an opportunity to harvest capital losses to help offset previous gains.
- Revisit your tax planning. Unfavorable economic news might require a tweak to your tax planning. Lower anticipated income could justify reduced estimated tax payments or income tax withholding. If you’re retired, consider deferring retirement account withdrawals or changing the type of investments you were planning to liquidate. A review of your tax situation is always a smart move.
The bottom line: Don’t make a bad economic situation worse.