The stock market continues to experience downward volatility. While we believe that sticking to your goals-based asset allocation is the best strategy for long-term wealth creation, there are other proactive strategies investors can use to benefit from a falling market. Two strategies we are currently using are:
- Strategically selling certain positions at a loss to help offset gains elsewhere in the portfolio, or to offset gains in future years.
- Reallocating out-of-balance and/or concentrated positions in client accounts that previously had large unrealized gains.
In our experience, the two biggest drags on performance are fees (whether transaction or management fees) and taxes. When the market goes down, the opportunity to improve long-term returns through tax mitigation strategies is an important tool in any investor's toolkit. For example, given the recent market decline, we are actively monitoring client positions to see which ones may be useful for selling at a loss. Typically, we are looking for positions that have had losses in excess of $10,000 because we want the benefit from selling at a loss to be worth taking the loss in the first place. Once these positions are sold, we cannot reinvest in the same or similar security for at least 30 days. When the 30 day threshold is reached, the loss we realized can be used to offset gains elsewhere in the client’s portfolio or the loss can be “carried forward” to offset gains in future years.
Another strategy to employ when markets are down is to review the asset allocation of individual accounts to see how that fits into our client’s overall portfolio strategy. For example, over the past few years, we have swapped certain high and low-cost basis assets between irrevocable and revocable trust accounts for clients who want to make charitable gifts with appreciated securities. We do this so that we make sure the client is gifting from the right account to maximize their tax mitigation. One of the issues that occurs in these asset swaps is that one account may become overly conservative while the other account may become overly aggressive. To help move our client accounts back toward their target allocations, we can use market downturns to realize lower gains or potentially “harvest” losses in out-of-balance or concentrated positions. This accomplishes the goal of potentially accruing losses for use this year or in a future year while also rebalancing the client account and moving their asset allocation toward their goals-based target.
While no one likes to watch the value of their portfolio decline, we encourage you to remember that there are strategies you can employ during market downturns to enhance your long-term wealth creation. If you would like to discuss how the current market downturn can be used to build your wealth, please reach out for a free consultation.