With the S&P 500 Index down over 20% Year-to-Date, we are officially in what investors call a “bear market.” How long will it last? No one knows, but there sure are a LOT of opinions out there! A look at history tells us that the median bear market is 8 months and the average is 11 months. We are 5-6 months in now. With employment staying strong and corporate earnings expected to grow, we could see a change in sentiment, especially if we see inflation numbers come down.
The most important thing right now is not to panic and stick to your long-term goals and financial objectives. This is one reason why we urge our clients to have a financial plan on file with our firm. In times like this, it is very helpful for keeping things in perspective. While it’s important not to panic, every market environment also presents opportunities to do something to improve your portfolio. Here are some actions that can help investors scratch that itch to DO SOMETHING. We’ll call it a Bear Market Playbook…
Rebalance: Sounds simple and it is! It’s a good time to rebalance your portfolio if you haven’t in a while. This only works though if you have a target allocation. If you’re a client with our firm – good news. We do have a target and we have been rebalancing at various times this year. It feels counterintuitive but rebalancing means you sell off some winners and buy more of the losers. Over time, rebalancing has proven to work for buying low and selling high. True, things could go down further but with long-term investing, you don’t have to worry about timing it perfectly.
Take Tax Losses: In taxable accounts, it’s a good time to offset capital gains by harvesting losses. Again, if you’re a client with us, we are considering this strategy for you already.
ROTH IRA Conversions: I have done more Roth IRA conversions this year than I have in the past 17 years for clients. (Of course, progressively I have more clients so take it with a grain of salt.) Conditions are more favorable for Roth conversions when the market is down. Why? Because the tax owed on a Roth conversion is based on the value in your Traditional IRA on the date of conversion. When the market recovers (which as an investor, I think it’s important to believe that at some point it will), the money in your Roth IRA is generally compounding TAX-FREE interest. Don’t want to convert your entire IRA? You can convert part of it. Another good reason to have regular reviews with all of you that are clients – we discuss things like this in those reviews.
Just Keep Buying: Especially if you are young and/or have a long time horizon, there is a very good chance that in 3 years, 5 years, and certainly in 10 years, you will be able to look back on today as a good time to invest. The long-term trend has always been up for markets. This may be your opportunity to buy stocks on sale. Again, this is a strategy good for longer-term investors and ones that can stomach volatility.
There are other strategies in the Bear Market Playbook but these are the most common ones. If you are a client with our firm, we will discuss these things as they are applicable to you in your coming reviews. When Angel reaches out to schedule one, we urge you to make the time to come and see us. If you are not quite due for a review but feeling antsy or just want to discuss your portfolio, please call me.
Update on Gas Prices: As we are all seeing, higher oil prices contribute to inflation directly. There was a strong correlation between inflation and oil prices in the 1970’s and we are seeing it again today. Although it could be a while before we see gas prices come down and stay down, I heard on the radio this morning that gas is 6 cents lower than last week (as a national average). We will see if this trend continues but many believe it will not, especially going into the holiday and during Summer travel season. Also, the government is considering a Federal Gas Tax Holiday for about 3 months. The gas tax is currently 18 cents per gallon and has been set at that rate for over 2 decades. One possible issue with removing the gas tax is that it’s unclear if this savings will be passed down to the end consumer. Some say this is a desperate attempt for the government to appear to be doing SOMETHING to help consumers.
Stay tuned for more updates and Happy Summer to all of you!