Didn’t we expect that we would be here at some point?
With inflation hovering stubbornly near 40-year highs, and with the Federal Reserve on its most aggressive rate increase schedule in recent memory (if ever), three of the major stock market indices have now officially closed in bear market territory.
It’s easy to give in to the sense of hopelessness to which many investors succumb during periods of lackluster returns, but I would encourage you to look on the bright side.
Pull the sheets down from your face, pop out of bed with a verve you haven’t shown since the early days of spring, and throw aside the sash to let the sunshine in. Openly scoff at your dour friends who pretend that the markets won’t come back one day and overwhelm their sullen spirits with the unbridled optimism of someone who knows better.
While you remind yourself that this market rout will likely get worse, maybe drop a needle on that Beatles tune “Getting Better”, and consider the fact that there IS something that you might be able to do to better your financial situation…even in times like these.
Plan Your Way Out
When I tell you that I fully expect that the stock (and bond, for that matter) markets will recover, it isn’t with some wanton disregard for the current economic challenges the global economy faces.
With domestic stock market history as our measuring stick, there has been no economic challenge from which our economy hasn’t recovered, and given that the New York Stock Exchange was founded way back in 1792, that puts my positivity well within “reasonable” territory.
Sure, this could be the one time that the economy falters and fully fails, but given that economy isn’t in terrible shape these days (take a look at some of the raw economic data, already, and turn off the cable news), no economist or analyst that I rely on is suggesting that the end is nigh.
This gives all of us the opportunity to take a deep breath, ride the markets where they take us, and effect change in your financial life where you can: by taking advantage of the planning opportunities a down market presents.
When stock markets plunge, bond markets tend not to, or at least, as is the case this year, they tend not to fall as quickly. The investment strategies investors often employ pair stocks and bonds in various measures in the portfolio to take advantage of this lesser correlation and the protection it can bring to a portfolio in a down market.
If stocks have lost value and bonds haven’t, then your 60% stock and 40% bond portfolio might look a little off-kilter these days. The steeper the slide in stocks, and the lesser the correlation, the higher the likelihood that your 60/40 is now 50/50.
In the hands of an adept financial planner, your portfolio will have withstood the market volatility to a degree that the investment balances can still serve your longer-term goals. Still, that planner will likely suggest a shift in the portfolio, if it doesn’t already occur automatically, to sell 10% of the total portfolio’s bond holdings and to buy 10% of the total portfolio’s stock holdings.
Think about it: aren’t we always told to sell ‘high’ and buy ‘low’?
If bonds have lost less and if stocks have lost more, then a reallocation to your appropriate risk level, assumed to be 60/40 for this illustration, gives you the benefit of buying stocks that have been devalued, giving you a greater number of shares in those holdings so that your portfolio can supersize its recovery if (but really, can’t we just agree that it is ‘when’?) the recovery comes.
ROTH to Death
And how about that ROTH conversion your friends have been telling you about?
Given the tax benefits of a ROTH IRA, namely the totally tax-free growth it affords you, most of us should at least consider the benefits of conversions at some point.
When markets dip, the opportunity presents itself in down markets to convert a devalued Traditional IRA holding to a ROTH IRA, pay income taxes on the lesser conversion amount, and capture the growth of the eventual recovery in a totally tax-free, Required-Minimum-Distribution-free environment.
Now consider the diminished tax impact of this move if you have already retired and you are receiving a lower income today then when you had been working. Maybe it’s not such a bad deal?
And did I mention that the ROTH IRA can be an amazing tool for estate planning purposes as well? To repeat, no RMDs!
Tax Loss Harvesting
What better time to discuss harvesting than the fall?
For those portfolios that have lost value in this downturn, if you have assets invested in devalued securities in a taxable account, this may be the year when you consider intentionally selling some holdings at a loss to offset any gains you had taken earlier in the year.
Don’t assume that just because you are harvesting a loss you are unable to recapture gains in the market when they climb again. An investor might choose to sell one beverage company stock and buy another brand, thus continuing an investment in the industry while still realizing the loss embedded in the shares of the former company.
Make the Most
While there is a probability that we haven’t yet seen the worst the markets will throw at us during this economic cycle, there is a likelihood that you haven’t considered all of the planning opportunities downturns can present.
Now is your chance to consider what you will do to make the most of this market rout.
Anthony M. Conte is managing partner at Conte Wealth Advisors based in Camp Hill. He can be reached at [email protected].
Registered Representative Securities offered through Cambridge Investment Research Inc., a broker/dealer, member FINRA/SIPC. Investment Advisor Representative Cambridge Investment Research Advisors Inc., a Registered Investment Advisor. Cambridge and Conte Wealth Advisors LLC are not affiliated.