How to Prosper During Market VolatilityBy Jesse Giordano, CFP® | March 23, 2020
It’s been a turbulent couple of weeks for investors—and chances are you’re feeling some degree of anxiety during this time of market volatility. At the end of the day, you’re only human, and keeping cool during times like these can feel a lot easier said than done.
With that being said, when it comes to portfolio performance, reacting emotionally to market declines could ultimately end up doing more harm than good. In addition to staying the course, savvy investors are also using this bout of market volatility to revisit their long-term investment perspective. If you take a moment to adjust your mindset and zoom out to capture the bigger picture, you’ll see there are actually financial opportunities abound.
It’s all about leveraging the present moment and tweaking your wealth management strategy accordingly. At the same time, we acknowledge that the anxiety many of you are facing right now is real and valid. We see you, we understand, and we’re here to help you take a breath and refocus.
Here are some things to keep your eyes on.
Consider Tax-Loss Harvesting
Market volatility can actually present a ready-made opportunity to reap tax savings by way of tax-loss harvesting. This involves selling off poorly performing investments, allowing yourself to take the loss, then replacing those investments with ones that are similar. Why would you do this? It’s a move that allows you to offset capital gains you’d otherwise encounter from your portfolio’s other appreciated assets.
In light of recent stock market declines, tax-loss harvesting can provide your portfolio with some coverage since more of your money stays invested (instead of going toward taxes). Another perk: if your capital losses ultimately outweigh your gains, up to $3,000 can be used to offset ordinary income.
Just keep in mind that tax-loss harvesting can only be done with taxable accounts. There are also specific rules around what kinds of investments you can use to replace the ones you sell off, so it really pays to work with a financial advisor who understands the complexities.
Think about Roth IRA Conversions
If you’re carrying a traditional IRA that’s especially heavy in stocks, now marks a great time to convert it to a Roth IRA. When you take distributions from a traditional IRA during retirement, you’ll be hit with a tax bill. Converting that account to a Roth IRA now means paying taxes on that amount today—then enjoying tax-free distributions later down the line.
With stock prices currently sitting so low, the tax bill for doing a conversion now will be much lower than when the market is up. Current tax rates are also lower, thanks to the Tax Cuts and Jobs Act; an especially important detail. If you think your tax rate today is lower than what it will be in retirement, a conversion will ultimately cost you less over the long term. Check in with your wealth advisor to see if it aligns with your overall investment strategy.
Leverage Required Minimum Distributions (RMDs)
Let’s talk Required Minimum Distributions (RMDs). Thanks to the SECURE Act, the age at which you have to begin withdrawing funds from your tax-advantaged accounts has gone up from 70 ½ to 72. So beginning at this age, you need to start taking distributions from 401(k)s and traditional IRAs. Those who are in this camp may feel understandably nervous about tapping stock investments in their retirement accounts, but failing to take your RMDs will result in a 50 percent tax penalty.
With the market being so unpredictable lately, it may be wise for those close to retirement to rethink their RMD strategy to avoid a costly tax bill once they start taking distributions. It can make or break your tax liability in retirement.
Do you need to use these RMDs to cover basic living expenses? Or do you plan on reinvesting them or donating them to charity? A skilled financial advisor can help you make a plan that gels with your unique set of circumstances.
Cash in on Low Interest Rates
There are some bright spots to the current doom-and-gloom attitude hovering over the stock market—mortgage rates are lower than they’ve been in a very long time, and will likely remain low in the short term. Just a few days ago, in response to the coronavirus pandemic, the Federal Reserve slashed borrowing costs almost down to zero.
Financially speaking, now is an especially smart time to either purchase a home or refinance your existing mortgage to lock in a lower rate, which could save you a substantial amount of money over the long haul.
It’s a lot to digest, but Opal Wealth Advisors is right here with you. We’re ready to help you prosper—even in times of extreme volatility. The trick is tuning out the noise and leaning on your team of trusted advisors to help you chart the best path forward.
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