Although this journey through a global pandemic and economic slowdown is still unfolding, each day we know more and there are fewer unknowns. However, we are still facing a high level of uncertainty, and this can cause people to react in the extremes—either freezing up to complete inaction or making changes just to feel better that action is being taken.
In our role as wealth advisor to our clients, we take seriously our responsibility to help guide thoughtful decision making and wise action. Today more than ever, we want to focus not on what we can’t control in this uncertain environment, but on what we can control.
In our recent and ongoing discussions with our clients, we find there are a growing number of positive steps that we can take together during this difficult time. Below are seven of the more common actions we are recommending:
- Keep a long-term perspective. Just last year, almost every asset class had positive returns. Most stock markets were up in or near the 20%–30% range, contributing to one of the longest bull markets in history. The downturn we’ve seen in the markets this year, while significant, is somewhat a reversal of the significant upturns last year. Although the catalyst for the current bear market is certainly different than others, we know that after previous market downturns, stock returns have been very strong as they rebound out of the decline. We also know that responding in panic doesn’t pay off. Keeping a long-term perspective will help drive better decisions today.
- Confirm an appropriate “emergency fund.” One of the best strategies to help you sleep at night, even during market volatility, is to ensure the funds you need for spending in the near future are not at the mercy of short-term market movements. We can work with you to make sure you have an appropriate amount of cash or low-volatility investments set aside to fund either spending needs or just as an emergency fund—keeping this money steady when the near future is unknown.
- Revisit financial planning and/or cash flow projections. By reviewing how your resources will support cash flow needs into the future, we can help ensure that your spending should be sustainable. And if making changes to expenses in the near term would be advantageous, that could be a positive step to take during a difficult time. Reviewing scenarios for how the future may play out can be very helpful in creating the appropriate context for making decisions today.
- Use the market decline as an opportunity to harvest tax losses. A downturn in prices isn’t what we hope for when investing. But one way to make lemonade out of those lemons is to sell securities that are down from their purchase price. By “harvesting” those realized losses they can be used to offset taxable realized gains. This tax-saving strategy can be helpful today and possibly for many years into the future, since realized capital losses can be carried forward on your tax return. As we harvest losses, the proceeds from those sales are used to purchase investments in a similar category, so your portfolio allocation and opportunity to catch an upswing stay intact.
- Take advantage of tax law changes. We’ve seen multiple new planning opportunities arise after the passage of the SECURE Act of 2019 and the recent CARES Act of 2020 (Coronavirus Aid, Relief, and Economic Security Act). Some of the resulting planning opportunities we are working on or considering for our clients include:
- Roth IRA Conversions: Converting traditional tax-deferred IRA money into a tax-free Roth IRA does create taxable income on the amount converted, but it means all future earnings will be tax-free forever. As mentioned in our SECURE Act blog post, inheriting a Roth IRA is more attractive than a traditional IRA, given that distributions will be tax-free. For our clients who intend to use their IRA money as a legacy asset for future generations, market declines provide an opportunity to convert assets that may be down. This makes the taxable conversion amount lower and means the assets will be in the Roth IRA during a potential rebound.
- Update Charitable Giving Plans: If you want to give more in this time of crisis, or even revise your giving to support COVID-19-related causes and organizations, we can help you update your plan. The CARES Act also now allows you to deduct up to $300 in cash contributions, whether or not you itemize.
- Waive 2020 IRA Required Minimum Distributions (RMDs): The SECURE Act law changes include an extension for starting RMDs to age 72 from 70½, but the CARES Act now allows all IRA owners to have their RMDs waived for the entire tax year 2020. This allows you to keep IRA money invested and avoid creating more taxable income. And, if you already began RMDs, you may be able to use the 60-day IRA rollover rule to return distributions not needed back to your IRA and report those distributions as not taxable for 2020.
- Individualized Planning Opportunities: Given that each individual, family, or organization’s situation is unique, it is worthwhile to have a conversation so we can uncover other opportunities made possible by recent law changes (such as deferring tax or loan payments, applying for business loans, refinancing, reviewing beneficiaries, contributing to retirement plans, and more).
- Stay true to your investment strategy. By working together to take the above steps to benefit your financial situation, we can help you stay committed to your overall investment guidelines and curb the urge to take potentially harmful actions in your investment portfolio. You can read more about our philosophy of managing through market declines and rebounds in our post, “Stay the Course: There’s a Cost to Timing the Market.”
- Take proactive breaks from the 24/7 news cycle. We encourage you to take time away from the news and daily COVID-19 updates. The constant news feed is focused on keeping consumer attention and primarily benefits advertisers. It can be overwhelming to the viewer, and that can lead to unnecessary stress and anxiety. It’s important to stay both physically and mentally healthy so you can make the best decisions for your overall benefit. We, at Litman Gregory, are practicing this ourselves and believe it puts us in a better position to support thoughtful decision making with our clients.
If you would like to review any of these or other actions, please connect with your Litman Gregory Wealth Advisor. We are here for you and wish you and your family health and safety.
This written communication is limited to the dissemination of general information pertaining to Litman Gregory Wealth Management, LLC (“LGWM”), including information about LGWM’s investment advisory services, investment philosophy, and general economic market conditions. This communication contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment advice and should not be considered as a solicitation to buy or sell any security or engage in a particular investment strategy.
There is no agreement or understanding that LGWM will provide individual advice to any investor or advisory client in receipt of this document. Certain information constitutes “forward-looking statements” and due to various risks and uncertainties actual events or results may differ from those projected. Some information contained in this report may be derived from sources that we believe to be reliable; however, we do not guarantee the accuracy or timeliness of such information.
Past performance is no guarantee of future results, and there is no guarantee that the views and opinions expressed in this newsletter will come to pass. Individual client needs, asset allocations, and investment strategies differ based on a variety of factors.
Investing involves risk, including the potential loss of principal. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management feeds or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.
Nothing herein should be construed as legal or tax advice, and you should consult with a qualified attorney or tax professional before taking any action. Information presented herein is subject to change without notice.
A list of all recommendations made by LWM within the immediately preceding one year is available upon request at no charge. For additional information about LGWM, please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website (adviserinfo.sec.gov) and may otherwise be made available upon written request to email@example.com
LGWM is an SEC registered investment adviser with its principal place of business in the state of California. LGWM and its representatives are in compliance with the current registration and notice filing requirements imposed upon registered investment advisers by those states in which LGWM maintains clients. LGWM may only transact business in those states in which it is noticed filed, or qualifies for an exemption or exclusion from notice filing requirements. Any subsequent, direct communication by LGWM with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides.