The year was difficult on the investment markets.
The stock market is down considerably, with the S&P 500 index having lost more than 16% this year (through July 19). The US bond market is also down double digits, with the Bloomberg Aggregate Bond Index down 10% over the same period.
Times like these are usually uncomfortable for people with money invested in the markets. However, periods of volatility often present opportunities to put you in a better financial position in the future.
Here are some financial planning ideas to consider during these difficult times:
Rebalance your portfolio
When markets make big moves, portfolios can get misaligned. Now is a good time to consider rebalancing your investments toward the goal. This often means selling investments that have performed better and buying things that have fallen the most.
While it may feel uncomfortable, buying assets at lower prices right now could give you more upside potential when things rebound. Taking a disciplined approach to rebalancing is a good way to remove emotion from your investment strategy and set yourself up for long-term success.
Fund your IRAs and HSAs
Most people wait until the end of the year, or even near the tax filing deadline, to make their contributions to the Roth IRA (Individual Retirement Account), Traditional IRA, and Health Savings Account (HSA). If you have the cash, consider making these contributions now and buying at the lowest current prices.
A note on HSAs: Many people keep these cash accounts and use them to pay for routine medical expenses. If you don’t need to use the funds now, you can take advantage of the tax-free growth structure of these accounts by investing and growing the account for future healthcare expenses in retirement.
Consolidate your orphan accounts
If you have an old retirement or HSA account somewhere that you have neglected, now may be the time to consolidate that account and make sure the funds are properly allocated. Consider allocating these funds to areas of your core portfolio that are the most down.
Consider a Roth IRA Conversion
A Roth conversion is a strategy in which you take money from a pre-tax IRA and transfer it to an after-tax Roth IRA. The conversion amount will be considered taxable income for the current year, but funds transferred into a Roth IRA grow tax-free and future distributions are also tax-free.
Performing a Roth conversion during a bear market allows you to buy growth-oriented investments in a Roth IRA at lower prices and benefit from tax-free growth when markets recover.
Increase your contributions to your retirement plan
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 later if needed.
Collection of tax losses
If you have loss-making investments in a brokerage account (not a retirement account), consider selling the loss-making investments to “harvest” the tax loss.
You can use capital losses to offset any capital gains realized in the current year and then deduct up to $3,000 from other income. Losses in excess of this amount are carried forward to future years and offset future gains. It can help you save money on your taxes this year, and maybe years to come.
It is generally recommended to find a similar, but not a “substantially identical” security to buy and maintain the investment exposure in the portfolio. You can redeem your original investment after 30 days and avoid the “wash sale” rule, which negates the tax benefit of the loss.
Harvesting tax losses doesn’t always make sense, especially if you’re in a low tax bracket. If you are unsure, seek professional tax advice to ensure you will benefit from this strategy.
Managing bear markets is part of being a long-term investor. Seek to take advantage of the opportunities that often present themselves in these turbulent times. These strategies can help set you up for long-term success and get you closer to achieving your long-term goals.
Lucas Bucl is a CERTIFIED FINANCIAL PLANNER™ professional and a 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 develop and execute a plan to get there.