March 16, 2020

10 Financial Planning Ideas for a Bear Market

Corrections in the global stock market are never fun, but they can be learning experiences and, occasionally, opportunities to make smart financial decisions. Here are some things you ought to have in mind while markets continue to fluctuate unpredictably.

  1. Spend less. The families most impacted by market corrections are those that are relying on investment portfolios for a large portion of their current income. For these families, the key is to minimize the amount of equity that needs to be sold to maintain lifestyle needs. We have been preparing our clients for market downturns by discussing the idea of having a flexible budget through retirement. This way, when markets drop, reduced spending makes it possible to avoid needing to sell stocks at a low point.
  2. Tax loss harvest. It is difficult to time trades during a falling market, as there are many historical incidences where rapid upward market movements occur right after rapid drops, and missing these upswings can be devastating for long-term returns. Instead of selling stocks and moving to cash, the smarter strategy is to identify those securities in taxable accounts that have the largest unrealized losses. Tax loss harvesting is the process of selling these securities (in order to realize or “harvest” the loss for use on your 1040) and then using the sale proceeds to purchase a similar security, so you stay invested in that area. Our team is running screens daily to see when certain loss thresholds are crossed and is trading accordingly.
  3. Fund IRA and Roth contributions. If you, your children, or your grandchildren contribute to these accounts annually, it is best to make those contributions when stock prices are lower, so that you can purchase more shares.
  4. Utilize that safety fund if you need to. We advise our clients to set aside three to six months of cash for emergency expenses. Families should utilize this emergency savings before selling equities to generate cash flow. The theory here is the same as above — we’d prefer to not sell stocks to generate cash during a market correction. If you have cash elsewhere, use that before selling stocks.
  5. Start taking Social Security. This idea ties to the same theme as utilizing emergency cash. If you have been delaying taking Social Security and are selling stocks to generate income while you wait, consider filing for benefits instead. The best insulation from a bear market is guaranteed income sources, so if you have been delaying Social Security, talk with a planner about the trade-off and consider filing now to alleviate pressure on your investment portfolio.
  6. Consider converting funds to a Roth IRA. Money converted from a traditional IRA to a Roth is recognized as taxable income in the year of conversion. If your IRA is worth 20% less than it was in January, then the cost of converting to a Roth is 20% cheaper. I recently wrote a post, Seven Reasons to Fund a Roth, about why investors may want to convert to or fund Roth accounts, which you can read here.
  7. Make irrevocable gifts for estate planning purposes. Estate planning attorneys are armed with a variety of gifting strategies that are designed to use up as little as possible of a taxpayer’s lifetime estate tax exemption amounts through creative discounting. Market corrections present another form of “discount,” whereby a gift of investable securities made today is likely going to utilize 10-20% less of the investor’s exemption than it would have two months ago. If your family is worth over $10 million (see point #8) AND you are engaging in gifting assets to future generations, accelerating the gifting of stocks during what we hope is a temporary dip is an efficient strategy.
  8. Keep an eye on the election. As COVID-19 continues to make headlines, it is shaping political fortunes around the globe. The United States is eight months from a presidential election and that election will shape tax policy for the years to come. Earlier this year, there appeared to be a high probability that Donald Trump was headed for re-election, suggesting that the provisions of the Tax Cuts and Jobs Act of 2017 that relate to individual taxpayers would be extended beyond 2025. However, recent polls show an increasing probability of a change in political leadership, making it more likely that we will see taxes go in the other direction. The President’s opponents are proposing raising income tax rates, eliminating capital gains treatment for high income earning households, and lowering the federal estate tax exemption from $11 million per person to $3-5 million per person. Families engaged in multi-generational wealth transfer strategies may want to consider that the rules and limits applying to this area may not be this attractive again for a long time, if ever.
  9. Refinance debt. Investors have watched in awe as interest rates have dropped around the world over the last decade. Take advantage of these lower rates if you have not done so already. Recessions squeeze the bottom line of most banks, so be opportunistic and look for deals; as their businesses tighten, you may be able to get lower rates or have closing costs waived.
  10. Revise your financial plan if you are anxious. We tell all of our clients that our financial plans are living documents that are meant to be revised and re-examined periodically. Reviewing that plan will help you understand how important it may be for you to modify your spending habits, if at all, during this downturn.

The clients and investment professionals with whom I have spoken over the last few weeks have expressed similar certainties and uncertainties — they are certain the markets will rebound (as this is a public health crisis rather than a financial crisis like 1999 and 2008), but they are uncertain about when that rebound will happen. If you share the mindset that this is a temporary dip, then consider the ideas I have laid out in this post and look for ways you can be opportunistic. Please contact our team if you’d like help with this analysis.