It is natural to be emotionally tied to the performance of your portfolio. The money you have and continue to save is vital for your future goals. Whether those goals are retiring early, funding your children’s education, or leaving a legacy, a market pullback can feel as if you are taking a step back from those priorities. While it may spark concern, a pullback is a consistent event. According to Bloomberg research, the U.S. stock market typically experiences a 10% drop in value at least once a year. Through Bartlett’s 127 years of managing our clients’ wealth, we have encountered countless pullbacks. We are accustomed to navigating these storms, preparing portfolios to handle market pressure, and ensuring our clients’ financial goals are achieved. We also recognize that challenging times often bring unique opportunities to adapt and grow.

Below are a few tactics we are staying focused on amidst these uncertain times.

Maintain Your Investment Strategy

A properly allocated portfolio coupled with a long-term focus allows one to take a breath and recognize that a pull-back in the short-term will not affect their ability to achieve their goals. History has shown time in the market is more powerful than timing the market. Staying invested during a pullback, while it may be tough to watch, is a prudent move to ensure you reap the benefits of your savings when markets rise again.

Additionally, it is vital to maintain your investment contribution plan, even if you have concerns about the declining market. Continuing to invest while assets are at lower valuations will allow you to purchase more of the same assets than when they were at their heights (Ex. investing $1000 into a stock that was $10 a share would grant you 100 shares. If the stock drops 10% to $9 a share, you can now buy 111 shares for the same $1,000 investment). Many of you are already experiencing a version of this “dollar cost averaging” when you make periodic contributions to your workplace retirement savings or brokerage investment accounts.

Tax-Loss Harvesting

Tax-loss harvesting is a powerful tool that will help lower your tax bill. Tax-loss harvesting refers to “realizing” a loss by selling an asset for less than you purchased it for. You can use these realized losses to offset your realized gains (that increase taxes) from positions you sell that increase in value. Additionally, if you have any realized losses not offsetting gains at the end of this tax year, you can carry them over to future tax years. Our wealth advisors are constantly reviewing opportunities to capitalize on this strategy, but they have been sparse with the growth experienced over the past few years. With the recent pullback, many positions have retreated and can have their losses harvested. To keep the funds invested, we look to mimic the exposure from what we sold out of and will buy back into names we are still believers in at a later date.

Roth Conversion

Roth Conversions are another forceful tax planning tool. A pullback grants you the opportunity to convert more shares for the conversion dollar amount than you previously could. The idea is that you take a portion of pretax savings (Ex. assets in a traditional IRA or Rollover IRA from an old 401(k)) and choose to pay taxes on that amount as ordinary income today to avoid paying taxes on the amount in the future (the IRS requires distributions from these pre-tax accounts annually after age 73). If you expect to pay a higher tax rate in the future, it can be optimal to “convert” some assets to a post-tax Roth account at a lower tax rate today, lowering your future tax bills and your cumulative lifetime tax bill. Our wealth advisors routinely assist clients with Roth conversion planning and can walk through your situation to discuss how it might impact you.

Gifting Considerations

The idea of gifting more assets for the same market value follows our common example from above. For those annually giving gifts, a single tax filer can give up to $19,000 to an individual without needing to tap into their lifetime exemption. With our $10 a share example, one could gift 1900 shares and hit the maximum annual exclusion, but at the 10% drop in value of $9 a share, they can now gift 2,111 shares. Gifting the additional shares can be extremely beneficial if the shares have a low-cost basis and the recipient sells a portion when they are in a lower tax bracket.

The same logic applies to gifting to charitable interests. Estate planning strategies, such as contributing to Grantor Retained Annuity Trusts (GRATs), also provide the ability to gift additional shares of a target dollar amount, ultimately passing the assets to beneficiaries with minimal tax repercussions during the grantor’s lifetime.

In Summary

Although the recent market downturn may be stressful, it also presents unique opportunities to take advantage of. Maintaining your investment strategy to achieve your financial plan’s long-term goals is vital. Tax-loss harvesting, Roth conversions, and gifting are all prudent moves to consider as we navigate this market together. Be on the lookout as Bartlett will continue to dive deeper into these strategies in future content pieces.

As always, reach out to your Bartlett Wealth Advisor to discuss how these strategies can benefit you and your families.