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Never Waste a Market Crisis

Castlepoint Blog: Kendall's Counsel, The Point
June 07, 2022

After seeing U.S. stocks post the second-worst start of a year since 1932, you might be hoping for a come-from-behind win in the markets like Rich Strike’s improbable victory in the Kentucky derby. This is understandable as the S&P 500 and Nasdaq indexes are on a seven-week losing streak, and the market continues to be volatile.1

The bad news is there is no way to predict the near future or when the market will turn around. The good news, however, is there are some smart moves you can consider right now regardless of what the markets do in the near term.

Invest Cash and Buy Low(er)

Buying low and selling high is a wise way to invest and this may be the ideal time to invest more cash for long-term financial goals. Understandably, you may feel fear by investing amid uncertainty, but historically times like this have often been the best time to invest.  

Warren Buffett famously said, “Be fearful when others are greedy and be greedy when others are fearful.” Indeed, history is on the side of the investor who is willing to buy when markets are in turmoil. Going back to 1926, US stocks have tended to deliver above-average returns over one-year and three-year periods following a 20% or more decline.2,3

Fund Your IRA Account Early.

When it comes to investing new cash, consider funding your Traditional or Roth IRA account now rather than waiting. The maximum contribution for 2022 is $6,000 per taxpayer or $7,000 if you are age fifty or older. Most people procrastinate until close to the deadline to contribute to their IRA account but funding it earlier will give extra opportunity for your account to potentially grow more.4

Roth Conversion

One of the bright spots of a market downturn is the opportunity to save money on a Roth conversion.  For example, if you had a Traditional IRA that was worth $50,000 on January 1st and is now worth $40,000, you can convert now and pay tax on $40,000 instead of $50,000 just a few months ago.  If you have confidence that the markets will recover, you have chosen an ideal time to convert.

This strategy does not have an income limitation and can be a powerful way to lower your future taxes, particularly if you believe tax rates will be higher in the future.  Although there is no guarantee of this, current tax rates are historically low.5

Beware of a couple of things to be mindful of with Roth conversions. First, this strategy will increase your taxable income for the current year, so it’s important to plan for a larger tax bill. Ideally, you should pay the taxes with dollars outside the IRA. Also, Roth conversions cannot be undone once they are executed, so make sure you run the numbers first, ideally with your tax and investment advisors.

Harvest Losses in Taxable Accounts

A down market is the ideal environment to look for tax loss harvesting opportunities in your portfolio. You can realize capital losses by selling positions that are lower than the price you bought them, and then immediately buying another similar security (although not the exact same security).  

The beauty of this strategy is that you can realize capital losses for tax-planning purposes, while leaving your asset allocation strategy intact. Taxpayers whose capital losses exceed their realized gains for the current year can also deduct remaining capital losses from their ordinary income up to $3,000 for married couples and $1,500 for others.6

You should be careful not to violate the wash sale rule when tax-loss harvesting, which disallows a capital loss if you buy back the same security you sold within the last thirty days.7 Again, it’s important to consult with your tax and investment advisors prior to executing this strategy.

Will You Be a Victim or Victor?

In sports, it’s been said that the best defense is a great offense. In like manner, you can play some offense and score some points in your financial planning, regardless of how long this market downturn lasts.  

You now know that you don’t have to be a victim in these markets when there are effective and proven strategies to come out a victor in your planning. In the meantime, let’s pull for stocks to have a Rich Strike come-from-behind victory in 2022. 

Sources

  1. https://www.cnbc.com/2022/05/15/stock-market-futures-open-to-close-news.html 
  2. https://www.investopedia.com/articles/investing/012116/warren-buffett-be-fearful-when-others-are-greedy.asp
  3. https://www.theplanningcenter.com/history-shows-stock-gains-after-declines/ 
  4. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits 
  5. https://nam12.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.investopedia.com%2Froth-ira-conversion-rules-4770480&data=05%7C01%7CReagan%40castlepointwealth.com%7C55f14918d1564d0cc83808da39e3b2b4%7Ce7bf54b2d53b4ace814b42f936a6706c%7C0%7C0%7C637885947361204675%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&sdata=E9b9Bbcx9hAcxCcv3hcNkRgIddT0z6e9SsX36lpbea0%3D&reserved=0 
  6. https://www.investopedia.com/articles/personal-finance/100515/heres-how-deduct-your-stock-losses-your-tax-bill.asp 
  7. https://nam12.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.investopedia.com%2Farticles%2Ffinancial-advisors%2F010716%2Fhow-avoid-violating-wash-sale-rules-when-realizing-tax-losses.asp&data=05%7C01%7CReagan%40castlepointwealth.com%7C55f14918d1564d0cc83808da39e3b2b4%7Ce7bf54b2d53b4ace814b42f936a6706c%7C0%7C0%7C637885947361204675%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&sdata=gIzjal0XwEq4IkcNOhkLPd3mzO%2FLKrkgl6sWiFk5YKM%3D&reserved=0

The content of this article is developed from sources believed to provide accurate information. The information is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. All expressions of opinion are subject to change. This content is distributed for informational purposes only, and is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products or services. Past performance is not a guarantee of future results. Index performance does not reflect the expenses associated with the management of an actual portfolio.

Castlepoint Wealth Advisors | Oklahoma Wealth Advisors | Kendall King - Founder & CEO

Kendall King, CFP®, AEP®

Founder & CEO of Castlepoint Wealth Advisors

Kendall is the Founder and CEO of Castlepoint Wealth Advisors, an Independent Wealth Management firm in Oklahoma City. He is responsible for the strategic direction and vision of the firm, and serves as lead advisor to a diverse group of clients, with special focus on entrepreneurs. With more than 18 years experience in advising clients on a wide range of wealth management topics, Kendall possesses extensive expertise and specialized knowledge regarding IRA and retirement planning topics.

Read more Kendall’s Counsel blog posts and articles.