Throughout the first three quarters of 2022, the United States economy has seen significant short-term volatility, with the S&P 500 seeing a 23% pullback in the summer months. While still maintaining sound investment principles of asset allocation, diversification, and having a long-term time horizon for money invested, many investors are seeking ways to take advantage of this volatile time. Here are a few discussions we’ve been having with clients in 2022 to take advantage of a market downturn:
For clients that were planning on converting money from their Traditional IRA to their Roth IRA, a down market is a generally advantageous time to accelerate this planning opportunity. For example, let’s assume a client has a Traditional IRA with a balance of $90k, down from its earlier balance of $100k. If the client is in a 32% tax bracket, performing the Roth conversion at the market downturn will result in an estimated tax savings of $3,200, as the client would be making an estimated tax payment on a lower overall balance (32% tax payment on $90k as opposed to $100k). Then, once the money is inside of a Roth account (provided the account has been open for five years and not touched until 59.5), all growth and distributions would occur completely tax-free. Performing the Roth conversion while the market is suppressed allows all market recovery to occur in a tax-free environment (Roth IRA), as opposed to an account that will eventually be taxed at your ordinary income rate upon taking distributions (Traditional IRA).
Funding Roth IRAs/Backdoor Roth IRAs
For much of the same reasoning above, it is generally advantageous to fully fund your annual Roth IRA contribution ($6,000 if under the age of 50, $7,000 if over 50) during a market downturn.
Investing Excess Cash
Generally, we advise clients to keep six months of expenses completely liquid and available for their emergency fund. Let’s assume monthly expenses are $5,000, so a $30,000 emergency fund would suffice in this example. If a client has $100,000 of cash on hand, we would generally recommend investing $70,000 into the market, particularly into any asset class that has seen a double digit pullback. Assuming this is money earmarked for mid and long-term goals, we’d advise investing the excess cash to allow the money to better work to help clients achieve their financial goals.
Selling Fixed Income and Purchasing Equities Within Investment Portfolio
Our general philosophy on having fixed income exposure is that we want our clients to have seven years worth of spending needed in retirement held in fixed income instruments to avoid the risk of receiving lower or negative returns early in a period when withdrawals are made from an investment portfolio. For example, if a client needs $100,000 pulled from their portfolio annually to maintain their lifestyle, we’d advise the client to have $700,000 of their portfolio in fixed income instruments like bonds, cash, or cash value inside of a life insurance contract to help weather market volatility in the distribution years. With this principle in mind, if a client has more than seven years worth of distributions in fixed income, we’d generally advise to sell out of any excess fixed income positions and purchase equities at a discount.
Before implementing any of the above points, it is worth consulting with a financial and tax advisor to ensure that any action steps are fully in line with your financial plan.
Equilibrium Wealth Advisors is a registered investment advisor. The contents of this article are for educational purposes only and do not represent investment advice.
Stock markets are volatile, and the prices of equity securities fluctuate based on changes in a company’s financial condition and overall market and economic conditions. Although common stocks have historically generated higher average total returns than fixed-income securities over the long-term, common stocks also have experienced significantly more volatility in those returns and, in certain periods, have significantly underperformed relative to fixed-income securities. An adverse event, such as an unfavorable earnings report, may depress the value of a particular common stock held by the Fund. A common stock may also decline due to factors which affect a particular industry or industries, such as labor shortages or increased production costs and competitive conditions within an industry. For dividend-paying stocks, dividends are not guaranteed and may decrease without notice.
Past performance is no guarantee of future results. The change in investment value reflects the appreciation or depreciation due to price changes, plus any distributions and income earned during the report period, less any transaction costs, sales charges, or fees. Gain/loss and holding period information may not reflect adjustments required for tax reporting purposes. You should verify such information when calculating reportable gain or loss.
This content has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of issue and may change over time. This is not an offer document, and does not constitute an offer, invitation, investment advice or inducement to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any matter contained in this document. The tax and estate planning information provided is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
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* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.
* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* All indexes referenced are unmanaged. The volatility of indexes could be materially different from that of a client’s portfolio. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. You cannot invest directly in an index.
* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* The Dow Jones Industrial Average (DJIA), commonly known as “The Dow,” is an index representing 30 stock of companies maintained and reviewed by the editors of The Wall Street Journal.
* The NASDAQ Composite is an unmanaged index of securities traded on the NASDAQ system.
* International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* The risk of loss in trading commodities and futures can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The high degree of leverage is often obtainable in commodity trading and can work against you as well as for you. The use of leverage can lead to large losses as well as gains.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee it is accurate or complete.
* There is no guarantee a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
* Asset allocation does not ensure a profit or protect against a loss.
* Consult your financial professional before making any investment decision.
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