Update: Positioning Your Portfolio to Maximize Investments During Volatility

While nobody likes market pullbacks, such periods of volatility can create opportunities to improve your long-term financial situation in several ways. As always, we are here to serve as your guide, keep you informed on opportunities, and make the needed adjustments that keep your long-term financial goals on target.

With that objective in mind, the following strategies are some that may suit many of our client portfolios. If there is something here that you wish to investigate further, please reach out to us so that we can discuss your specific circumstances.

Roth Conversion

A Roth conversion is typically used to take monies from a tax-deferred vehicle, such as a traditional IRA or 401(k), and move them to a Roth IRA in low-income years. However, some may consider making accelerated conversions while the market is down and while income tax brackets are lower for most.

Although you have to pay the taxes in the current year, having more assets in your Roth comes with several benefits. Assuming you are over 59.5 years of age, any withdrawals you make from a Roth become tax-free after five years. By converting now when the market is at a low point, there is a higher potential for larger tax-free growth in the long-term; moreover, you are paying fewer taxes on those same assets than today.

Maxing Out Your Qualified Plans & Long-Term Savings

Many clients spread out their contributions to 401(k)s, IRAs, and other long-term retirement accounts evenly throughout the year rather than maxing them out as soon as possible. Typically, this helps smooth out expenses on a month-to-month basis and also allows for consistent and systematic buys into the market. However, front-loading your contributions may be an effective strategy right now to take advantage of low markets.

In previous crises and bear markets, most of the recovery occurred within the first 12-months after hitting the low. Maxing out funds you had already earmarked for long-term savings may increase the chances that more of your contribution is available and growing tax-advantaged once the recovery begins.

An Unwinding of Concentrated Positions

Many investors find themselves with a concentrated position in a single stock. This concentrated position can come from acquiring company stock over several years or from owning a stock that has appreciated quicker than other positions within the account.

A concentrated position, however, can increase the risk within a portfolio and limit flexibility with other assets. For some clients, the large capital gains from the concentrated position often make selling difficult to gain portfolio diversity. Selling now when the market is depressed would realize fewer gains and allow you to invest in a more diversified portfolio that can also capture the upside when stocks recover. Additionally, if a position was bought at multiple times, you may also choose the purchase-lot that would provide the greatest overall tax benefit.