Dear Clients and Friends,
Winston Churchill beat me to the punch with his well-timed quote, “Never Let
a Good Crisis Go to Waste.” While no one enjoys seeing the financial markets
going down, this can be a strategic time to take advantage of market
weakness and consider various financial planning strategies. Below, I cover
some of these ideas.
For the record, we do not consider the most recent mild decline in the market
to be the beginning of a crisis, or even the start of a renewed bear market. We
believe the recent weakness is nothing more than a pit-stop amid a longer-term
recovery from last year’s bear market. That said, let’s look at some
strategies for weak markets.
1) Boosting Contributions – When you shop for your groceries, you’re in
constant pursuit of discounts. Why should investing be any different? A
popular and common adage in investing is to “Buy Low, Sell High.” By
increasing your contributions, whether it’s to a retirement plan (401K,
403B, IRA) or an investment account, you acquire additional shares on
the cheap and when the market eventually recovers, you reap the
rewards. This also helps to avoid market-timing, a popular behavioral
bias when it comes to investing. However, if anyone has a good
algorithm for market timing, I’m all ears!
2) Roth Conversions – A Roth conversion is when you transfer money
from a pretax retirement plan (traditional 401K or IRA) into a Roth
401K or IRA account. Since no taxes were ever paid over the years, the
conversion is considered income and gets reported on your tax
return. Aside from the tax-free growth of Roth accounts, the beauty of
converting when the markets are down is that you save some tax
dollars on the conversion since your investments have
depreciated. Some other perks of conversions are that Roth style
accounts aren’t subject to any Required Minimum Distributions, the
access to tax free withdrawals after you meet certain requirements, and
they are excellent for estate and legacy planning.
3 ) Gifting - For 2023, the annual exclusion amount was raised to
$17,000 per person, or $34,000 per married couple. You can leverage
your gifting ability by transferring shares from your portfolio, allowing
the recipient to enjoy the market appreciation when the market
rebounds. You can also help with educational goals and contribute
towards a 529 plan. If you really want to up the ante and turbocharge
your gifting, you can make a lump sum gift of five years’ worth of the
exclusion. Based on the $17,000 limit, that’s $85,000 worth of
gifts. The caveat is that you're unable to gift any more funds for the
proceeding five years.
The government also has a lifetime exemption amount of ~$12,000,000
per person, so any gifts below this threshold and you won’t pay a penny
in gift tax. Starting in 2026, the lifetime exclusion reverts back to
~$5,490,000 per person and it’s a use or a lose situation.
4 ) Tax Loss Harvesting - This strategy allows you to sell any
investments in your nonretirement accounts at a loss so you can offset
any gains you have from other investments that you sell. When you file
your tax return, if your losses outweigh your gains, you're allowed to
report a capital loss up and deduct up to $3,000. Any losses in excess
are carried forward for the following years. Overtime, tax loss
harvesting has been proven to help in terms of returns, reducing risk
and enhancing portfolio diversification according to a white paper from
Vanguard. Thanks to last year’s overall stock and bond performance,
we at MOR Wealth Management did a record number of tax loss
harvesting for our clients. For any clients that accurately guess how
many, we’ll donate $100 to a charity of their choosing.
5) Time for a Gut Check? – This may be an opportune time to rethink
your risk tolerance. During periods of market turbulence, people tend to
reexamine how much risk they believe they can withstand and
reevaluate. This is something we at MORWM review on an annual basis
when we update your financial plans or are reviewing portfolios.
6 ) Funding Accounts – If you have some cash sitting on the sidelines
not earning any interest, consider putting that money to work! If you
have a child that has earned income from working, you can open a
custodial account (we prefer a Roth IRA for kids) and fund their account
so they can get a head start on their retirement journey. Another idea
is that for anyone utilizing a health savings account, invest your hardworking
dollars. According to Employee Benefit Research Institute
(EBRI), as of January 2021, only 12% of accountholders invested their
funds.
As irritating as they are, market declines are an inevitable part of the investing
game. That’s why it’s important to integrate all aspects of your financial plan
with your investments, so when opportunities like market downturns present
themselves, you’re ready to pounce and take advantage.
Onward and Upward,
Devin