investing

The Upside of a Downside Market

Watching your portfolio dive doesn't feel good, but such a situation can come with some positive financial possibilities. Here are some strategies you may want to take advantage of right now.

The year so far has presented a challenging time for investors. However, periods of market dislocation also can provide opportunities on the financial planning side to create a better long-term position.

Here are five things you can do right now, to prepare for the future financially and take advantage of lower equity prices. 

Create a Personal Balance Sheet and Income Statement

Many of us are still spending most of our time sheltered in place and have already watched everything new Netflix has to offer. Now may be a time to take advantage of the lack of travel or social engagements to get your financial house in order.

Start by completing a financial plan with a personal balance sheet and income statement. Just like with a business balance sheet, a personal balance sheet breaks down assets, income and liabilities, such as debt and financial commitments. A budget then helps forecast where spending is expected, savings can be gained and goals met.  According to a 2018 study by the Certified Financial Plan Board of Standards, “Consumers who have a budget feel more in control (62%), more confident (55%) and more secure (52%).”

Review Your Asset Allocations and Rebalance Your Portfolio   

The coronavirus and its economic fallout have caused some assets to move by 15%-25% in a couple of days in both directions. A study from the CFA Institute states that rebalancing a portfolio of 60% stocks, 30% Treasuries and 10% commodities quarterly led to a 21% improvement in the risk/reward ratio, with both higher returns and lower volatility.  Market dislocations allow for rebalancing of portfolios to match risk tolerance in a more tax-efficient manner.

The market volatility can also reveal your risk tolerance. For instance, do you experience a tremendous amount of stress when a stock tumbles or do you know that this is part of the ups and downs of daily trading? Based on your response to the recent market volatility, you can now adjust your portfolio accordingly. The current environment can give the ability to sell appreciated assets and get risk tolerance in line with long-term goals.   

Harvest Losses in Taxable Accounts

Compared to 2019, equity investors now have a higher likelihood of having losses in certain securities than can be used to offset capital gains on a tax bill. By “realizing” a loss on a security that dramatically dropped in value and buying a similar equivalent security, you still maintain an overall investment allocation but can greatly benefit the timing of your tax payments and reduce your tax bill due next April.

Covert Traditional IRAs to Roths to Tap into Tax-free Growth

The decline in your portfolio equates to a similar level of income tax savings when converting a traditional IRA to a Roth IRA at depressed levels. You must pay taxes on the amount you convert, but since stock values are down, the tax bill on the transaction would be lower as well. Then, when the market bounces back, the gains appear in the Roth IRA and will be permanently tax-free. 

This could be a particularly good strategy for clients with longer time horizons or those who expect their 2020 income to be lower than future years. Please ensure to consult a tax professional to ensure there are no other effects on your tax situation. 

Gift or Transfer Depressed Assets Outside the Estate

The short-term mispricing of assets can provide significant tax benefits to gift/sell them out of an estate at a big discount. This means that assets can be transferred to a family member with lower taxes due to its “bargain” prices that are expected to appreciate during a market recovery. Funding 529 college savings plans now and allocating into stocks at potentially short-term depressed levels is also a good idea. This is essentially investing in savings plans and stocks that are at lower-than-expected prices but may see increased value after the economic recovery.

While no one likes seeing the value of their investment accounts drop, there are some benefits to lower balances from a tax, estate and investment strategy point of view. Sometimes, you must fight the urge to freeze and act when times are bad to take advantage of the best opportunities.

About the Author

Kevin Barlow, CFA®

Managing Director, Miracle Mile Advisors

Kevin Barlow, CFA®, is managing director of Miracle Mile Advisors, and has over 13 years of professional experience in financial services working with high-net-worth individuals and families on customized investment solutions.

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
How to Calculate the Break-Even Age for Taking Social Security
social security

How to Calculate the Break-Even Age for Taking Social Security

When it comes to maximizing your Social Security benefits, there are many elements to consider. One factor that can be especially enlightening is your…
August 30, 2021
Spend Without Worry in Retirement
Financial Planning

Spend Without Worry in Retirement

Fears of running out of money prevent many retirees from tapping the nest egg they’ve worked a lifetime to save. With these strategies, you can genera…
August 30, 2021

Recommended

The Downside of Delaying RMDs
required minimum distributions (RMDs)

The Downside of Delaying RMDs

With the SECURE Act 2.0, Congress is contemplating raising the age for required minimum distributions. However, don't assume you would benefit from th…
September 16, 2021
Is a Target Date Fund Right for You?
investing

Is a Target Date Fund Right for You?

You're busy, and poring over investments is a pain. Wouldn't a target date fund be easier? Take a look at their pros and cons to see if incorporating …
September 14, 2021
What's My Social Security Full Retirement Age?
social security

What's My Social Security Full Retirement Age?

The year you were born determines when you become eligible for your full Social Security retirement benefit. Use our calculator to determine your full…
September 14, 2021
Beware of the Tax Traps in Retirement
retirement planning

Beware of the Tax Traps in Retirement

The stage is set for higher tax bills and surcharges for retirees, if they’re not careful. From RMDs to taxes on Social Security and higher Medicare p…
September 9, 2021