Financial Planning During Down Markets
During periods of market volatility, it is very normal to pay close attention to your portfolio while putting other aspects of your financial life on hold. However, there are many important planning items that should not be overlooked during these times. Here are a few planning ideas that can be implemented during market downturns that will help add to your after-tax return over time.
- Roth Conversions – When markets turn south, it can be a particularly good time to perform a Roth Conversion. You can convert tax-deferred assets to Roth when the investments in the account are depressed in value – this is taxable at ordinary income rates. When the market ultimately recovers, that growth is captured, tax-free, inside of the Roth IRA. So, if you were going to consider a Roth conversion later in the year, you might want to think about doing that conversion in the near term during this period of market volatility.
- Gifting – Whether it is to charity or family members, gifting is an important part of many financial plans:
- Charity – If you are thinking of giving marketable securities to charity, you might consider waiting to donate until later in the year. With the recent market downturn, delaying the gift could allow time for stocks to recover and then be donated at a higher value, resulting in a larger tax deduction for you. If you prefer to give now, ensure that the stocks you plan to donate are long-term appreciated securities. Or, if you previously funded a Donor Advised Fund, you could consider gifting from that account.
- Family – In addition to charity, gifting to family members can be an important part of your plan. Gifting to others can be particularly valuable when markets are down, as the value of gifted securities is lower for gift tax purposes, and all subsequent appreciation will be excluded from your estate – a win for both you and the donee!
- Tax Loss Harvesting – We know that investments can go down in value. When they do, there is an opportunity to sell that investment, take the capital loss, and swap into a different security that provides similar market exposure. The end result is you have a tax loss to use to offset capital gains and you remain invested in the market. These capital losses, while tough to look at, result in real dollars saved in the form of a lower tax bill.
- Stick to Your Plan and Investment Strategy – Last, but most importantly, trust your plan! The retirement planning we do accounts for stressful market environments like we are currently experiencing. What’s important is to stay focused on your long-term goals and control what you can control – saving, keep spending in line with your plan, rebalancing, and capitalizing on strategies to reduce taxes. It is the patient, disciplined investor that will ultimately win in the end.
Luckily, periods of significant market volatility are generally few and far between. However, when these downturns show up, they come with opportunity. If you can execute on one or more of the above items during this tough time, they should add value to your financial situation in the long run.
Matt is a wealth manager at BDF. He sits on BDF's Financial Planning Committee and leads many of the firm's tax-related initiatives. Matt has a passion for building strong relationships with his clients and helping them make sound decisions. He also holds the Certified Exit Planning Advisor designation which helps him advise business owners on how to exit their business and prepare for retirement.