Markets continue to be volatile which, as we’ve discussed in the past, is Wall Street gibberish for ‘lower.’ The uncertainty surrounding inflation, the Fed and what may very well end up being a classically defined recession is weighing heavy on stocks. One of the mistakes investors make during difficult environments such as this is to sit idle, frozen with insecurity, neglecting some unique opportunities. I thought it would be helpful to run through a few strategies we are exploring with our clients.
Accelerate Roth Conversions – Typically, near the end of the year we’ll begin working with folks to assess their taxable income for the year and calculate how much can be converted from an IRA into a Roth before jumping into a new tax bracket. The benefits of Roth conversion can be numerous, with the ability to pay tax now, at what may end up being a significantly reduced tax bracket, while eliminating future RMDs as well as the income tax burden for beneficiaries. While a Roth conversion is a sound strategy in any environment, consider pursuing this with investments that are trading lower now, thus repositioning them into the Roth at depressed prices. Once markets recover, these investments will be securely tucked into your Roth and thus avoiding the tax man forever. If you aren’t quite sure if this is a strategy you should consider, let’s talk about it and run the numbers. When investments are down, this is an extremely proactive measure to better position yourself for the future.
Invest HSA dollars – The Health Savings Account is one of the best tax advantaged savings accounts around and yet most people fail to take full advantage. Designed to provide a tax break upon contribution and a convenient way to pay for medical expenses, most don’t realize that many of these HSAs allow for investments as well. For example, if you have an HSA through Fidelity, more than likely you have the ability to purchase investments such as the S&P 500 directly through this account. Why would you do such a thing if you are going to use this money? Great question. Rather than using these funds directly, consider paying out of pocket and accumulating the receipts. At present, there is no time period rule when it comes to HSA reimbursements, which means you can accumulate a slew of receipts over years and at some point in the future remove funds from your Health Savings Account as a reimbursement thus avoiding any tax at all. Let’s assume for a moment you were to invest the $6,000 family amount into an HSA and purchased an S&P 500 fund. Over the next 20 years this amount grew at an 8% rate and equaled $28,000.00 Eventually you wanted to use this money and after adding up all the medical receipts you accumulated over the years were able to reimburse yourself for this to the tune of $28,000.00. This strategy ultimately provided not 1, not 2, but 3 tax benefits, as your initial investment was deductible, the amount grew tax deferred and because you reimbursed yourself for medical expenses, withdrew the entire amount tax free! When markets are down, investing your HSA may provide a massive benefit in the future that most are completely unaware of.
Tax Loss Harvesting Bond Funds – One of the challenges with 2022 is that not only are stocks down, but bond funds are lower as well. While tax loss harvesting is common among equities, its been years since we could say the same for bonds. While this decline in what is traditionally a ‘safe’ asset class has been annoying, consider swapping out of your bond fund and accepting the loss all the while allocating in a similar profiled fund to take advantage of any bond rebound. While losses are never fun, most fail to understand that they can be harvested to offset current or future gains. Let’s say the average bond fund is currently down 10% on the year. If you find yourself with a $100,000 position which is now $90,000, it may be advantageous to swap out of this bond fund and repurchase something of similar profile thus locking in the $10,000 loss but not abandoning the asset altogether. Bonds will often move in lock step and there are literally thousands of bond funds following similar strategies. It is not difficult to find a similar profile of anything being sold. Bonds have had one of the sharpest declines in history. Regardless of your view on where rates go from here, consider taking advantage of the tax loss and making the most out of the current situation.
iBonds – Much has been written about the current iBond phenomenon. Daniel has written extensively on this and we continue to make ourselves available to help people navigate the ‘not so user friendly’ government website TreasuryDirect.gov. While inflation remains elevated, the historically boring iBond has taken center stage and may be a fantastic place to store a portion of your emergency fund. Limited to $10,000 per person, per year, the iBond is currently yielding over 9%. This will reset every 6 months, so it is possible this is a peak but even a decline to say 5 or 6% is much better than passbook rates at your local or national bank. Again, the website is clunky and not that user friendly so please let us know if you need any assistance getting an account set up and purchasing. Keep in mind this is not for retirement accounts, but rather only non-retirement money typically held in your savings or checking account.
General Investing – I would be remiss not to mention one of the simplest and potentially beneficial strategies we all should be reminded of during a difficult environment: sticking to the plan. It always amazes me how people shy away from markets when they go on sale and it becomes an area much more attractive than weeks or months before. I’ve been in this business for over 20 years now and I vividly remember one of my first days on the job around the 2000 peak when a wealthy client informed me that I should seek another career path since markets were certainly done forever. They were convinced beyond a shadow of a doubt that the market decline kicked off by the tech bubble bursting was the long-awaited top marking the end of capitalism in our country. Thankfully, I didn’t agree.
A few years later, I witnessed 9/11 and markets closed for 5 days as we grappled with the potential for war on our own soil. I was told ‘this time was different’ and corporations would never recover.
In 2008 and 2009, the financial crisis nearly did mark an end to capitalism and I recall reminding myself of just how dire the picture looked in 2000 and again in 2003. I wondered how it must have felt in ‘29, ‘32, ‘74, ‘87 or ‘95 where previous crises marked certain tops and the certain end of business as we knew it. I reminded myself how betting against the spirit of America was never a winning trade.
Covid marked something we had never seen as no one I knew was investing during the Spanish flu. This decline ushered in some of the greatest uncertainty I had ever seen, yet once again capitalism prevailed. Long before the pandemic was over, markets edged higher and anyone selling out of fear or panic once again were punished for attempting to predict American demise.
Today we face uncertainties surrounding a foreign war, a failed energy policy, inflationary pressure and a country-wide reopening spurred by a generally healthy consumer. Stocks aren’t quite sure what to make of the confluence of data but once again I find myself looking for the silver lining and assessing the opportunities rather than the pitfalls.
Despite going through what most investors have in the last few decades, I find it fascinating that so many are once again succumbing to the pressure and thinking that this time is different and unlike all the previous challenges we’ve faced, somehow this will be the time we fail to succeed.
While there is no question difficulties and challenges persist and many are convinced the great American downfall has arrived, countless pages in the history books suggest otherwise.
Regardless of your views on where we go from here, consider using the recent decline to your advantage. The above strategies may be a great starting point and should you have any questions, please don’t hesitate to let us know.