“What goes up, must come down.” Whether you attribute that quote to Isaac Newton or the band Blood, Sweat & Tears, it is a fact of life. Anything that has risen or been raised up must eventually fall down. The stock market is certainly not immune to this idiom. I’m not one for bold predictions. A market correction could come next month, in November, in 2017 or beyond. No one can know for sure when it will happen. But I am sure of this; a market correction will happen, eventually.
I’m not sure anyone would argue with me on that. What is debatable is how to prepare for this inevitable event. Most investors, in times of stress, feel like they need to do something. Anything. Sitting back and being patient for things to get better after experiencing losses isn’t easy. At the same time, the worst thing to do is over-react because stock market history also tells us, what came down, will over time, go back up.
So here are 3 financial planning strategies that are designed to help you benefit from temporary lower asset valuations based on typical market downturns.
- At the very least, rebalance your portfolio. While not always easy to do, ignore the impulse to sell when the market dips. In fact, do the opposite. Rebalance your portfolio to buy more of those “under valued investments.” This may be a buying opportunity for you.
- Consider a Roth IRA-Conversion. Roth accounts allow assets to grow tax-free, for your lifetime and your heirs. You’ll have to pay income taxes though, on the amount you convert, at the time of conversion. So why not convert after a market drop when the value is lower? You will be able to have more of your Traditional Pre-Tax IRA assets placed into a Roth for a given tax cost. In fact, if you did a Roth conversion prior to a market downturn (even in the prior year) you are allowed to push the reset button and get a more advantageous do-over (if you follow some specific rules). With this strategy it is important to note that Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA.
- Make planned gifts. If you’re in a phase of life where gifting your estate is a goal, consider accelerating this plan when asset values decline. For example, anyone can gift $14,000/year to any one. If you have stock and don’t want to cross that threshold and incur gift tax liability, make the gift at the time of a market decline and you can get more shares into your beneficiaries hands.
No one likes to see portfolio losses, even if short-term. So my pitch of making lemonade out of lemons, admittedly, still means you’re dealing with lemons. But financial planners like us are trained to develop strategies for any environment good or bad, in an attempt to keep you on your path forward. Sometimes you have to zig when others zag, and make lemonade out of lemons. It’s one of the many ways we try to help.
If that sounds like a lot to consider, or you know you’ll need help with your emotions during the next market turn, give us a call. We are here to help align your personal values, vision and wealth.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
No strategy assures success or protects against loss.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor
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