Jul 3, 2023
Market Pullbacks and Financial Planning
With market volatility come ups and downs. Many people pay closer attention to your portfolio when the headlines are flashing red. But we’ve found that taking a step back to evaluate the bigger picture can be beneficial to your stress levels as well as your wealth. When life gives you lemons, as they say, consider a few of the planning ideas below to make yourself some lemonade:
1. Capture tax-free growth with a Roth conversion
In our view, when markets are down, it can be a great time to perform a Roth conversion. If you move tax-deferred investments to Roth when they are depressed in value, when the market recovers, that potential growth will be captured, tax-free, inside the Roth IRA. In our experience, if you were ever going to consider a Roth conversion, it might be beneficial to do it during a period of market volatility.
2. Time your gifts to save taxes
Giving to family members can be an important part of your financial 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 to charity might not be best when the market is down. Should the markets recover, your donation could provide a greater benefit to the end charity and result in a larger tax deduction for you. If you have a Donor Advised Fund in place, we suggest considering using those funds in the meantime since they have already generated a tax deduction and been earmarked for charitable purposes.
3. Harvest a loss for tax purposes
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, then swap it for another investment that provides similar market exposure. This gives you a “tax loss” that can be used to offset capital gains from other investments while remaining invested in the market so you can capture any bounce back that might occur. Realizing these capital losses can result in real dollars saved in the form of a lower tax bill without changing the outlook on your portfolio’s returns.
4. Rebalance your portfolio
While reviewing your portfolio for tax losses, we suggest considering your current allocation compared to your target allocation. Market volatility can be broad, and not all assets move up or down simultaneously—or at the same rate. Rebalancing means paring back the assets that have risen in value and adding to the ones that have fallen. Not only does this seek to keep your portfolio aligned with your original asset allocation strategy, but we believe it is also the tried-and-true way to “buy low and sell high.”
5. Stick to your plan
Last but what we see as most important, trust your plan! In our view, any good financial plan is designed to anticipate stressful market environments from time to time. We suggest controlling what you can—such as saving, spending, rebalancing and capitalizing on strategies to reduce taxes.
Periods of significant market volatility may come around every once in a while, and when they arise, they present potential opportunities. The ideas here can make sense when they align with your goals and your plan and have the potential to add value. While sometimes difficult, we believe it is important to take a step back to prioritize your long-term goals. From our experience, it is the calm, patient and disciplined investor who will enjoy the sweetest lemonade.
ABOUT THE AUTHOR
Josh Larson, CFP
Josh is a Wealth Advisor in our Itasca, IL, office. He focuses on providing Advanced Planning solutions for unique and complex situations. He studied at Aurora University, earning degrees in Accounting and Business & Commerce. Josh is a CERTIFIED FINANCIAL PLANNER™ professional.
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