We get this question often, especially in down markets like we are experiencing now. “What do I do when the market is correcting?” “What do I do if we are in a bear market?” “If there is a recession, what does that mean for me and my financial planning and investments?”
We strive to construct an all-weather portfolio for our clients to ensure they are prepared when the bear market happens. We spend time constructing the asset allocation that is appropriate for each client’s situation and cash needs. Most clients are not 100% invested in the stock market, and while bonds are not without their risks, they provide the certainty of cash flows and income when clients need them. If circumstances have changed in your life, we should review and adjust your allocation accordingly. However, if your situation has not changed, we would recommend staying the course, sticking to discipline, and not reacting emotionally to a drop in the value of your portfolio.
Bear markets have historically lasted from a few months to a bit longer than 19 months. We have no “crystal ball” and thus are not willing to trade in and out of the market to “time” the bottom (or top). We have a defined risk management process, whereby we constantly review and adjust the portfolio (taking profits when the market is up and reallocating to stocks when the market declines). We work proactively to understand your cash needs and timeline for investing so we do not have to sell at inopportune times. If your needs change and you require funds, we own highly liquid publicly traded securities and can generate cash despite the market dynamics and volatility.
You may say, “I understand I should stick to plan, but what else can you do for me? Can I do anything proactively to take advantage of the decline in the markets?” There are a few strategies to employ when markets are down.
If you are sitting on unproductive cash, you may consider contributing to your taxable account, maxing out a Roth IRA, using cash to fund your expenses and diverting more of your paycheck to your company retirement plan (if applicable), or funding your (grand)children’s college funds.
If you have required minimum distributions (RMDs) and do not need the cash, you may be able to journal assets that have declined in value from your IRA to your taxable account to allow for them to grow and be held for long-term capital gains, which in many cases is a much lower tax bracket than your regular income tax rate.
If you are performing Roth conversions or have considered Roth conversion strategies in the past, this may be a great opportunity to take advantage of the lower asset values to convert assets for future long-term, tax-free growth.
Another strategy is to harvest capital losses in stocks (or in some cases bonds) and use the losses to offset capital gains or build up some losses to use for future gains. Perhaps you sold real estate this year and have a gain; we can aggressively harvest losses in your investment portfolio to offset some of that capital gain. Perhaps you have a low-basis stock (or index fund) we have been holding for tax purposes; we may take losses and offset the gains from liquidating the low-basis position.
Ultimately, market drops and volatility, especially if you are near to or in retirement, can be daunting to confront. We strive to create a proactive investment and retirement plan for our clients to be able to withstand the emotional toll a bear market can take. We implore our clients to reach out if they have questions, are worried, or want to review strategies to take advantage of the current situation.
The information presented in this article is for educational purposes only and is not meant to provide individual advice to the reader. There is no guarantee the information provided above relates to your personal situation. All financial situations are unique and should be advised as such.
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