Market declines have always been a part of the long-term upward trend in the U.S. stock market. While never easy, a long-term investment approach that avoids making significant portfolio changes through the volatility has been rewarded historically with an eventual market recovery and continued growth.
Waiting out a market correction period can be tough. We recently provided our clients with some long-term portfolio data around market declines similar to the current one, and we offered several proactive steps they could take now to address their financial well-being.
Here is a summary of those steps for your consideration:
Reduce taxes
Reducing taxes is a zero-risk way to increase after-tax investment returns – the investment returns that matter. Recognizing capital losses for a tax benefit where appropriate and replacing the positions with similar (but not identical) positions, through “tax loss harvesting”, is a one way to reduce taxes.
Consider Roth conversions, opting to recognize income now for transferring funds from a traditional IRA to a Roth IRA. Although the conversion will be taxable now, the recovery and growth of the converted assets will be in the Roth wrapper, which is never taxed and does not require you to take distributions during your lifetime.
Check insurance coverages
Make sure you have sufficient property, casualty and liability coverage, including an umbrella liability policy. Read the fine print of your policies to make sure you know what is and is not covered. Review your life insurance policy and coverage in the context of your current and future needs, and finally, consider or review long-term care and disability policies.
Review your estate plan and beneficiary designations
Review your estate plan and consider the last time it was updated. Note whom you have appointed as an executor and trustee. Confirm the guardian(s) listed for your minor children. Evaluate your objectives for adult children, grandchildren and/or charitable causes in the event of your death. Use this overall review as a chance to consider if the plan for your assets and beneficiaries needs to be updated or revised.
When bad things happen, it is often too late to do anything about the financial consequences. As well, the laws governing the inheritance of retirement accounts and estate tax laws have changed significantly in the past five years.
Reevaluate your spending and budget in the context of your financial plan
It is common to spend more when your account balances are higher, which is not necessarily a bad thing. This is called a “dynamic spending” approach, and it allows for higher spending in bull market periods as long as spending is reduced when portfolio balances are lower through a bear market period.
Make sure your financial plan considers the impact of market downturns such as this current one. Parkside’s financial plans include “Monte Carlo” testing to illustrate and plan for the effect of market downturns.
If you have any questions regarding these steps or additional ones you can take regarding your own financial plan and well-being, please contact Parkside Advisors.
