Market Pullbacks and Financial Planning
With market volatility comes ups and downs. You may pay closer attention to your portfolio when the headlines are flashing red on the screen than prioritizing other aspects of your financial life; it is only natural. Taking a step back to evaluate the bigger picture can be beneficial to your wealth and stress levels. When life gives you lemons, as they say, consider a few of the planning ideas below that can be implemented during these times of uncertainty to add value over time and make yourself some lemonade:
1. Roth Conversions
When markets are down, it can be a great time to perform a Roth Conversion, moving tax-deferred assets to Roth when the investments in the account are depressed in value. When the market recovers, that growth is captured, tax-free, inside the Roth IRA. So, if you were going to consider a Roth conversion this year, you could think about doing that conversion in the near term during this period of market volatility.
Giving to family members can be an important piece of your plan. Gifting to others can be extra valuable when markets are down, as the value of gifted securities is lower for gift tax purposes. All subsequent appreciation will be excluded from your estate – a win for both you and the (surely grateful) recipient! On the other hand, gifting for charitable purposes could benefit from delaying. Should the markets recover, your donation could provide a greater benefit to the end charity- and result in a larger tax deduction for you. Of course, if you already have a Donor Advised Fund in place, consider using those funds in the meantime since those funds have previously received a tax deduction and are already earmarked for charitable purposes.
3. Tax Loss Harvesting
We know that investments cannot go up all the time. When they inevitably drop below your purchase price, there can be an opportunity to sell that investment and take the capital loss for tax purposes while swapping into another investment that provides similar market exposure. This gives you a ‘tax loss’ that can be used to offset capital gains and you remain invested in the market – capturing any bounce back that might occur. While tough to look at, these capital losses result in real dollars saved in the form of a lower tax bill without changing the outlook on your portfolio’s returns.
While reviewing your portfolio for tax losses, consider your current allocation relative to your target allocation. Market volatility can be broad, and not all assets move up or down simultaneously – or at the same rate. Efficiently rebalancing to your target allocation when parts of your portfolio become over or underweight is the tried-and-true way to ‘buy low and sell high’.
5. Stick to Your Plan and Investment Strategy
Last but most importantly, trust your plan! The financial planning we perform includes stressful market environments like we are currently experiencing. Control what you can control – saving, keeping spending in line with your plan, rebalancing, and capitalizing on these strategies to reduce taxes.
Periods of significant market volatility have been few and far between, which has been beneficial to portfolios. However, when these situations arise, they present opportunities. Taking advantage of any of these ideas as they align with your goals and plan should add value to your financial situation in the long run. While difficult, it is important to take that step back to prioritize your long-term goals. It is the calm, patient, and disciplined investor that will enjoy the sweetest lemonade.
Josh focuses on provided Advanced Planning solutions for unique and complex situations. He sits on the firm’s Financial Planning Committee, responsible for educating the BDF team to ensure each client benefits from customized proactive advice. He studied at Aurora University, earning degrees in Accounting and Business & Commerce. Josh is a CERTIFIED FINANCIAL PLANNER™ professional.