The spread between the annualized trailing 10-year return of value stocks and that of growth stocks as of early this month was at the same extreme level as in early 2000. Investors may also consider lightening up on growth stocks and adding shares of their polar opposite - value stocks.Īs of early June, value stocks were down 11% for the year, though they have risen since March. Yet, as these investments are stocks subject to value swings, the average investor's risk tolerance would probably dictate limiting preferred-share holdings to 10% or 15% of a total portfolio.
Though traded as shares, preferred stocks function more or less as bonds but have much higher yields in the form of dividends - often as high as 5% or 6% annually. One alternative is preferred stocks, a fixed-income asset where loss of principal due to credit risk is less likely for the foreseeable future because the lion's share of issuers, financial institutions, have never been stronger.Īlso, preferred shares tend be less sensitive to interest rate moves than they are to credit, so rising rates would be less of a threat to principal. So reducing your bond exposure is a good idea. If the rate on the 20-year Treasury (1.18% early this month) were to rise 1% in two years, you'd lose 15% of your principal. If the interest rate paid on the 10-year Treasury bond (.65% early this month) were to increase 1% two years from now, this would mean that selling current bonds on the secondary market would bring a loss of 7% of principal. Credit risk in the bond market is currently quite low because the Fed has backstopped virtually all bonds.īut interest rate risk may never have been higher. Middle-class and upper-class investors may want to consider adjusting their bond holdings - including those in their 401(k) plans, if possible - to lower risk. Another reason to convert to a Roth this year is if your IRA asset value was hit hard by the shutdown and you reasonably expect it to be higher in years to come. Roth conversions are a particularly good idea if you expect your income tax rate to be higher in retirement or you want to avoid RMDs from IRA assets, which begin at the age of 72. More from FA Playbook: Financial advisors face new challenges Op-Ed: Here's a game plan to help create retirement security Your advisor took a PPP loan. Yet, as a Roth conversion involves withdrawing the tax-deferred assets in your IRA, it triggers ordinary income tax on the value of these assets, so it's best to have the cash outside of your IRA to pay the tax.
Therefore, a Roth IRA conversion gives you the flexibility to lower taxable income in retirement and allows your assets to grow tax-free. Unlike IRAs, Roths involve no required minimum distribution.
While IRA contributions are made with pre-tax money, contributions to Roth IRAs are made with post-tax money, so there's no tax on qualified withdrawals. For example, if the economic impact of the virus has cut your income this year and you expect to earn more next year, this might be a good time to convert your individual retirement account into a Roth IRA - assuming this works with your long-term financial planning.
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