The broader capital markets struggled through the first three quarters of the year, but despite all the volatility, there are some tactical moves that can help you take advantage of this environment. Depending on your current investment strategy, here are a few potential moves that you can review for 4th quarter success.
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Rebalance Between/Within Asset Classes
With the broader stock and bond markets suffering double-digit losses this year, now is the time to get your asset allocations back in line. If your portfolio was tilted toward higher quality stocks and low duration/higher credit quality bonds at the beginning of 2022, then congratulations; you likely outperformed. If this is you, a rebalance will redirect capital between and within stocks and bonds to take advantage of the areas in the market most punished this year.
If, however, your portfolio was more closely aligned with broader stock and bond market indices, your situation is more complicated, with both stocks and bonds suffering similar declines. If this is you, the rebalance will be more within the respective asset classes, and not necessarily between asset classes.
Recommendation: Make sure you take the time to rebalance investment portfolios. Regardless of your situation, rebalancing is the secret to managing risk and setting portfolios up for consistent long-term success.
Tax Loss Harvesting
This strategy pertains ONLY to taxable brokerage accounts and involves selling portfolio positions with “Unrealized” capital losses and turning them into “Realized” capital losses. Note: when executing this strategy: 1) You must own a position for at least 31 days before the sale, and 2) Leave the position sold for at least 31 days after the sale for the losses to be realized for tax purposes. The harvesting of losses allows one to not only offset realized gains incurred from other areas of a portfolio but also deduct up to $3,000 of losses against ordinary income if losses exceed the realized capital gains. Lastly, if losses remain after offsetting gains, and deducting the $3,000 against ordinary income, those losses can be carried forward to offset realized capital gains and income in future tax years.
This strategy involves voluntarily paying taxes to convert money from a Traditional IRA (Tax Deferred Account) to a Roth IRA (Tax-Free Account). While most people are naturally against paying taxes sooner than necessary, let me discuss the advantages. The intent of the strategy is to pay taxes now in a lower tax bracket and transfer money to the tax-free environment of a Roth IRA to avoid potentially more significant taxes in the future. Additionally, Roth IRAs have no Required Minimum Distributions (RMDs) later in life. While this strategy requires a more thorough understanding of one’s personal tax bracket, age, etc., there are tremendous advantages if you find yourself in a lower tax bracket in 2022 and believe higher tax brackets are in your future.
Note: All situations are different, make sure to consult your financial advisor, or tax professional, while reviewing and before executing these strategies.
Marshall Clay CFP, J.D., is a Partner and Senior Advisor at The Welch Group, LLC, specializing in providing Fee-Only investment management and financial advice to families throughout the United States. Marshall is a graduate of the United States Military Academy in West Point, New York, the Cumberland School of Law in Birmingham, Alabama, and is a CERTIFIED FINANCIAL PLANNER™. In addition, Marshall is a frequent guest on local television stations as an expert on various financial planning matters.
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