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A Rare Second Chance to Protect Nest Egg Savings

If you had regrets when the stock market plunged, here's what to do now

layered display of a downtrend financial chart, one-dollar bills, stacks of gold coins and a cube with the word sell

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En español | If you were terrified in March but didn't do anything, you have a chance to do something now.

You had good reason to be worried then. As of March 23, the Wilshire 5000 total market index — a much broader measure of the U.S. stock market than the Dow Jones industrial average — had lost 34.8 percent in just 33 days. The loss came far faster than either the 2000–2002 tech wreck or the 2007–2009 financial collapse — in fact, it was the fastest bear market in history.

While I have no clue of future stock performance, I do know that the excruciating pain will return and you'll kick yourself if stocks plunge back to those levels or lower. So now is the time to consider taking some risk off the table. Here's how you should decide whether to do so — and, if you do, what to do with that cash from any stock sales.

What goes down…

Despite the COVID-19 crisis worsening, with U.S. cases exceeding 1.7 million, tragic deaths in the U.S. going well over the 100,000 mark, and unemployment surging to unimaginable levels, the stock market fooled us (as it always seems to do) by gaining 35.9 percent from March 23 through May 26. In fact, U.S. stocks are down only 6.8 percent for the year — and up 6.4 percent from 12 months ago.

As I said back in early April, "No bear market should go wasted." Begin by pulling out your March statement and looking at those losses. Try to remember how horrible it felt. It really wasn't that long ago, and the feeling should be pretty fresh in your mind. Ask yourself how you'd feel if it happened again, remembering that the market would be unlikely to recover so quickly next time.

Next, assess how much money you need to fund your lifestyle in addition to what Social Security will provide. If you don't need much more, then consider taking some risk off the table and lighten up a bit on stocks.

Finally, understand the tax consequences of selling. If you've been a long-term investor in low-cost stock index funds in your taxable accounts, you should have some large unrealized capital gains. It's possible you won't have to pay federal income tax on those gains if your total income is low enough, though you should run this by your accountant first. I call this tax-gain harvesting. If you're investing in a tax-deferred retirement plan, such as a 401(k) plan, you won't have any tax consequences until you withdraw your money.


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What to do with the cash you raise

First and foremost: Remember that your goal is to take risk off the table. If someone pitches a high safe return to you, don't bite. I keep hearing radio commercials about a safe 10 percent return but it didn't look so good once I checked it out.

And though “high-yield” bonds and bond funds look attractive, don't take that bait, either. They are also called “junk bonds” because their issuers often have shaky credit ratings. Junk bonds typically lose a ton of money when stocks fall.

Keep this money safe. You may actually have an opportunity to earn a decent return without risk by paying off credit-card or mortgage debt. Paying off debt is the same as earning the interest you are paying the bank, and potentially could be the equivalent of tax-free earnings.

Otherwise, you want to put this money in high-quality bond funds or CDs. High-quality intermediate bond funds gained in value when stocks tanked. They are yielding only about 1.5 percent as of May 26, but the money will likely be there when you need it to live on. And that rate isn't as bad as you think. People fondly remember when they could earn 12 percent back in 1980 until I point out that, after taxes and high inflation, they lost far more spending power than with today's rates.

Other safe options include CDs from banks and credit unions backed by either the FDIC or NCUA. Bankrate and DepositAccounts list some CDs yielding 2 percent. Always stay below federal insurance limits, which are $250,000 per individual or $500,000 for joint accounts. If you are so fortunate as to need more insurance, there are ways to title the accounts to get more.

Online savings accounts also are yielding 1.4 percent or more, though there are no guarantees rates will stay this high or as high as you would get with a CD. Bankrate and DepositAccounts list these as well. Don't leave your money at a bank yielding some paltry amount like 0.01 percent.

Bottom line

Remember that the purpose of money is to give you choices in life. I've seen many people take unnecessary risks with their money and have to either go back to work or drastically cut back on their lifestyle. So use this second chance the market gave you to assess how much risk you want to take with your financial freedom. Let me repeat — don't blow this second chance.

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