Uncertainty around the impact of the coronavirus has brought a high level of volatility and has ultimately driven us into bear market territory (a pullback of 20% or more from peak levels). Daily market swings of 4%+ make it difficult to efficiently rebalance asset classes back to their respective targets. As a result, our advisors and Investment Team are patiently waiting for volatility to settle down before rebalancing portfolios and potentially taking advantage of buying opportunities that the market pullback has created.
Market behavior is out of our control. The way we react to market behavior is not. There are various planning strategies to consider today that may better position clients financially in the long run.
With asset prices significantly lower than they were just a month ago, converting equities from a Traditional IRA to Roth IRA could prove to be beneficial. In doing so, you pay taxes on assets converted at depressed levels with the hope they will rebound and continue to grow long-term. All of the growth that occurs in the Roth IRA is tax-free, as are future distributions taken at least five years after the conversion.
Refinancing in a Market Pullback
The stock markets tend to grab the headlines, but the Federal Reserve stole the spotlight this weekend when they cut interest rates to 0%. Although mortgage rates do not move in lockstep with the rates set by the Fed, they have indeed fallen. Refinancing your mortgage at a lower interest rate may make sense.
Individuals with a low level of after-tax assets and the stomach for debt may want to consider a cash out refinance as well. The cash portion could be invested in their portfolio with the expectation that it should earn more than the mortgage rate over the long-term. Note that this will increase the principal owed and the rate may be higher than that of a traditional refinance.
Tax-Loss Harvesting in a Market Pullback
Once volatility normalizes, we will be looking to tax-loss harvest in our portfolios. The objective here is to realize losses in taxable accounts that can later be used to offset gains. The proceeds generated by selling securities at a loss are immediately reinvested in a similar vehicle so that market exposure is not lost. That way, if a rebound occurs, those dollars participate.
One of the objectives of Grantor Retained Annuity Trusts (GRATs) and Spousal Lifetime Access Trusts (SLATs) is to remove future growth from a client’s estate. We should expect higher future returns on stocks following a dramatic pullback relative to where those expected returns were during a 10-year bull market. Housing assets with higher return potential in these trust vehicles enhances the opportunity to shift growth outside of clients’ taxable estates.
Reduce Concentrated Positions
This could be an opportunity to trim positions that represent a large weight in client portfolios. Concentrated positions can be built from gifts of stock, equity compensation, or simple outperformance of a holding. Oftentimes clients maintain these positions because they have a high level of embedded gains, causing them to be “tax-locked.” A market pullback can allow clients to sell down this position at a lower tax cost and redeploy the proceeds in a more diversified manner, thereby reducing risk.
Increasing Regular Contributions
In many households, individuals are making regular contributions to a retirement plan, taxable account, or both. Those contributions are then invested. Market fluctuations may cause panic and a desire to halt or reduce those contributions. Again, volatile markets and market pullbacks create buying opportunities. Those in this situation should maintain their rate of contributions or even consider increasing them to maintain a discipline of buying low.
This is not the first bear market the world has seen and it will not be the last. While these events are painful, we can view these time periods as opportunities to implement long-term planning strategies in the midst of market turbulence is a silver lining. Please contact your advisor to determine if any of the strategies discussed are appropriate for you.
Important disclosure information
Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.
Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.
This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.
RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.