It has been a difficult year in the investment markets.
The stock market has fallen significantly, with the S&P 500 index falling more than 16% this year (through July 19). The US bond market has also fallen by double digits, while the Bloomberg Aggregate Bond Index has fallen 10% over the same period.
Times like these are usually uncomfortable for those with money invested in the markets. However, volatile times often present opportunities to put you in a better financial position later on.
Here are financial planning ideas to consider during these challenging times:
Rebalance your portfolio
When markets make big moves, portfolios can get out of line. Now is a good time to consider rebalancing your investments. This often means selling investments that have outperformed and buying the things that have been down the most.
While this may feel inconvenient, buying assets at lower prices right now can give you more upside potential when things pick up again. A disciplined approach to rebalancing is a great way to take the emotion out of your investment strategy and help you achieve long-term success.
Fund your IRAs and HSAs
Most people wait until the end of the year, or even close to the tax filing deadline, to pay their Roth IRA (Individual Retirement Account), Traditional IRA, and Health Savings Account (HSA) contributions. If you have the money, consider making those contributions now and buying them at the current lower prices.
A note about HSAs: Many people hold these bills in cash and use them to pay current medical expenses. If you don’t need to use the money now, you can take advantage of the tax-free growth structure of these accounts by investing and growing the account for future health care costs in retirement.
Consolidate your orphaned accounts
If you have an old retirement or HSA account somewhere that you’ve been neglecting, now may be a good time to consolidate that account and make sure the money is allocated correctly. Consider allocating these funds to the areas of your main portfolio that are declining the most.
Consider a Roth IRA Conversion
A Roth conversion is a strategy where you take money from a pre-tax IRA and move it into an after-tax Roth IRA. The conversion amount is considered taxable income in the current year, but the funds moved into a Roth IRA grow tax-free and future distributions are tax-free as well.
If you complete a Roth conversion during a down market, you can buy growth-oriented investments in a Roth IRA at lower prices and take advantage of the tax-free growth when the markets recover.
Increase your pension contributions
If you can, consider increasing your regular contributions to your retirement plan. The idea is to contribute more while prices are lower. You can always adjust the contribution downwards later if necessary.
Harvesting Tax Losses
If you own investments at a loss in a brokerage account (not a retirement account), consider selling the investments at a loss to ‘reap’ the tax loss.
You can use capital losses to offset any realized gains in the current year and then write off up to $3,000 on other income. Losses exceeding this amount are carried forward to future years and offset future gains. This could save some money on your taxes this year and possibly years to come.
It is generally recommended to find a similar, but not ‘substantially identical’ security to buy and hold the investment exposure in the portfolio. You can buy back your original investment after 30 days and avoid the “wash sale” rule, which negates the tax benefit of taking the loss.
Harvesting tax losses doesn’t always make sense, especially if you’re in a low tax bracket. If you’re not sure, get professional tax advice to make sure you benefit from this strategy.
Controlling through downside markets is part of being a long-term investor. Try to take advantage of the opportunities that often present themselves in these turbulent times. These strategies can help you achieve long-term success and get closer to achieving your long-term goals.
Lucas Bucl is a CERTIFIED FINANCIAL PLANNER™ professional and member of the Financial Planning Association of Greater Kansas City. As a partner at Aspyre Wealth Partners in Overland Park, he helps clients define what success means to them, then create and execute a plan to achieve it.