Time to “Do Something”?

For the past month or so, there have been a lot of more down days than up ones in the stock market. Does the current market volatility have you down? Try running a wealth management business that doesn’t charge anything when accounts lose value!

You may have read my 2015 Accountable Update when I referenced Vanguard founder, John Bogle, in a July 2014 AAII Journal article. Bogle made a case that an advisors job is to keep our clients from “doing anything” that may ultimately reduce their chances of being successful investors.

While letting our emotions get the best of us during times of volatility can lead to poor decision making and timing, it may be over simplistic to say we shouldn’t do “anything” in reaction to lower prices in the market. Whether the bulls are running or the bears are roaring, there is always something we CAN be doing to increase the chances that we will be successful investors. This week’s update will focus on three things you can do right now to take advantage of the recent market turmoil.

1. Convert. If you have a Traditional IRA that you have been considering paying the taxes on to convert to a Roth IRA, now may be a more affordable time to take action. For example, if you have a Traditional IRA with 100 shares of ABC that was worth $100,000 in May that is now worth $90,000, you can think of it as a 10% tax discount on a Roth conversion thanks to all of the volatility.

2. Harvest. If you have taxable investments that are worth less than you bought them for, selling them can result in losses that can be used to offset gains on others. If you don’t have gains to offset, you can also deduct up to $3,000 of losses per year “above the line” on your tax return.

   Some of our competitors have done research showing up to 1+% more after-tax return from portfolios that regularly perform this practice. While that may be optimistic, there is value in deferring taxation and expediting the return of some portion of losses. There are several considerations when realizing losses for tax purposes, such as avoiding Wash Sales, so a consultation with a tax professional is advisable here too.

3. Re-balance. If you find that your asset allocation has drifted to a point where you have a larger percentage of your allocation in cash/bonds than you prefer, now may be a good time to re-balance. You will be putting more of your money into equities while the prices are lower than a few months ago. Over time, letting the prices tell us when it is time to buy and sell instead of our emotions won’t guarantee a profit or eliminate losses, but it should lead to a smoother ride.

All of these tactics should be considered in light of your personal situation and goals, but if the recent downturn in the stock market is making you feel like you need to do something, these are a good place to start.