Interest money

Strategies for consolidating retirement even in a declining market

David T. Mayes

It’s completely normal for investors to get nervous when stock market volatility kicks in. For young investors, stock market declines should be welcome because they provide an opportunity to add to their stock portfolio when stocks are on sale simply by continuing to make their regular salary contributions to their 401(k). Young workers have plenty of time for the market to recover and deliver expected long-term, inflation-beating returns. For older workers and retirees, it can seem like their retirement fortunes are completely out of their control when markets turn volatile. While understandable, it’s important to remember that there are still opportunities to make lemonade when the stock market seems to be serving only lemons.

Currently, investors with stocks and bonds in their portfolios are off to an unprecedented start to the calendar year. The U.S. stock market had one of its worst days since 1995 and bonds had one of the worst calendar year starts for their returns in decades thanks to rapidly rising inflation.

These slowdowns, however, should not derail an investor’s strategy. In fact, those who stuck with their portfolios during periods of volatility likely saw the best returns over time. In fact, staying the course is probably the best strategy for consolidating a retirement portfolio in a declining market. Emotionally, this can be a tough road, even for counselors. I cringed at a recent Facebook post that came across the newsfeeds of a friend of mine. The commentator said his adviser recommended that he shift his entire portfolio to “stable bonds”. It might have been good since something was being done in response to the stock market decline. The problem is that the best advice is likely to be the exact opposite. Yes, bonds are cheaper than they were a few months ago, but the rise in equities will likely come sooner and stronger than any rise in the bond market, as the latter will require a bearish environment. inflation and interest rates.

For perspective, Invesco recently published a commentary that looked at the potential returns for investors who invested $100,000 in the S&P 500 index in 1995 and either held on throughout or added or removed funds from their portfolios after each of the 54 worst trading days. Buy-and-hold investors would have seen their $100,000 rise to just over $900,000. Investors who withdrew just $1,000 after each of those days would have a portfolio worth just $711,000 while those who added $1,000 would be sitting on $1,095,000. That’s a big difference in long-term returns for small responses to market declines. Imagine how much worse it could be if an investor put their entire portfolio into “stable bonds” after the first downturn.

This should give young investors food for thought. Can you add more to your 401(k) when the stock market is selling? Even older investors should consider whether they have excess cash from stocks that could be used to add to their stock portfolio. Rebalancing into stocks in bear markets is one of the best ways to increase returns.

For investors who are comfortable with their cash safety net, stock declines can still provide opportunities that will pay off in the long run. Market downturns offer some great opportunities to improve an investor’s long-term tax position. Converting some pre-tax retirement funds sitting in traditional IRAs to Roth IRAs can be a great strategy to both hedge against rising tax rates in the future and take advantage of a stock market rally (yes , it will recover). Seek to fill your current tax bracket by transferring equity investments (whether individual stocks, equity mutual funds, or exchange-traded funds) in kind to your Roth IRA. You pay tax this year on the value of the shares transferred, but you lock in the current tax rate and future growth can be withdrawn tax-free once Roth’s holding requirements are met.

Another tax strategy to consider when stocks are down is tax-loss harvesting. This approach is designed to maintain an existing investment allocation, but collect losses that can be used to offset realized capital gains (or gains that can be distributed by mutual funds). Losses not used to offset capital gains can be used to offset ordinary income (up to $3,000) with any excess carried forward to future tax years.

David T. Mayes is a Certified Professional Financial Planner and IRS registered with Three Bearings Fiduciary Advisors, Inc., a fee-based advisory firm in Hampton. He can be reached at (603) 926-1775 or [email protected]