After many conversations with clients, I felt that some of the information I communicated to them was worth posting.
Every market correction has presented some opportunities as well. Below are actions that I am taking in client accounts where they are appropriate. I’ve also listed a few things that should be avoided during times like these. Again, the preparation coming into this sell-off should prove to be the main factor helping accounts stay on track towards meeting goals.
Steps that can be taken following market declines:
- IRA Contributions: For those considering contributing to any type of account, prices on all securities are far less than they were a month ago. “Sell high and buy low” is one of the oldest investment principles, or as Warren Buffett put it — 'Be fearful when others are greedy and greedy when others are fearful'.
- Reduce Distributions: On the other side of the equation, if you are taking regular distributions that can be reduced or you can delay a planned purchase, you will give your portfolio the opportunity to come back in value when we regain some stability.
- Realizing Losses: Selling positions that have gone down in value realizes a taxable loss that can offset gains now and in the future. This should be done only on positions that can be replaced by “like” positions so that the investment strategy is maintained.
- Realizing Gains: For clients with positions that still have large taxable gains, these gains have been reduced greatly as well. Positions with losses can also be sold at the same time to balance the tax situation. Again, all positions sold should be replaced with “like” positions to maintain the investment strategy.
- Roth Conversions: Growth inside of a traditional IRA is fully taxable when distributions are taken. Inside of a Roth IRA, all growth is tax free. With IRA values down and likely to come back at some point, converting some or all of these assets to a Roth IRA allows the “come-back” gain amount to be completely tax free when distributions begin. Taxes, but not penalties, are applied to the converted amount. In a year where many incomes could be lower, the taxes paid on the amount that is converted might be paid from a lower tax bracket as well.
- Rebalancing portfolios towards more growth: Market corrections create a natural de-risking of investor portfolios. If a portfolio was 60% stocks and 40% bonds in January, the asset mix might now be 50-50%. Repositioning to the strategy that was originally implemented to meet a client’s goals will allow for buying positions that have gone down in value while selling those with more stable current prices.
Steps that should be avoided following market declines:
- Moving positions to cash or taking large distributions: Because of the nature of this selloff which has been driven by fear and not fundamentals, almost all types of securities are down in value. Those who sell now must have a plan to buy back in at some point or they will jeopardize long range goals. Ideally they would buy in when prices are even lower. Realistically, they will likely be even more fearful at that time and will wait until they are comfortable with the market again . . . which is when prices are higher again.
- Focusing on account values rather than long range goals: Regularly checking account values is very defeating during times like these. I’m not advocating burying ones head in the sand, but the focus must remain on long range goals. It is extremely likely that market levels will return to new highs at some point in the future. This means that most investors whose plan was tracking before this crisis will ultimately get back on track.
I hope it helps to know that there are tangible steps that can be taken from an investment standpoint during these difficult times.
If any of these situations listed above applies to you and you'd like to get more information, please don’t hesitate to contact me.
Jack Schniepp is a CERTIFIED FINANCIAL PLANNER™ (CFP®, ChFC®) , financial advisor and the owner of Cascade Financial Strategies. CFS is a registered investment advisor licensed in Oregon, California, Washington, Arizona and Idaho. They specialize in socially responsible investing which integrates environmental, social, and corporate governance (ESG) criteria into portfolio construction.