Senior Wealth Planner, Wells Fargo Private Bank
Wealth Planner

In this Wealth Planning Update:

  • Non-stop market volatility makes it difficult for even the most positive among us to resist making emotional investment decisions.
  • A well-designed wealth plan can alleviate fear of the unknown by addressing all of your needs as well as your investment goals.
  • You can take actions during times of volatility to help you meet your long-term financial goals.

Glimpsing at your phone, tablet, or television as the stock market tumbles may make your stomach tumble. This feeling may be heightened in periods of prolonged market volatility such as the one we have experienced in the first quarter of 2016. During these times, it is difficult to remain disciplined and not make rash investment decisions based on emotion. 

Those who keep the bigger picture in mind, however, likely feel more confident about their financial situation even in these uncertain market times. If you are one of the lucky people able to filter the stock market noise created by 24/7 media outlets, you likely have either already implemented a wealth plan or are in the process of working with a qualified, objective advisor to create one.

A plan to stay calm during market volatility

A well-designed wealth plan not only provides you with a roadmap to help you reach your short- and long-term goals, but may also put the impact of bumps along the road into perspective. Such awareness can help you focus on what’s important to you and how you’re likely to achieve it, rather than daily market fluctuations and negative media reports. As a result, you are less likely to act impulsively and emotionally to market events and thereby miss the upside when markets rebound. Here are five benefits to having a plan right now:

1. Goals-Based Blueprint: A custom wealth plan should focus on what is important to you. It should confirm, organize, and allow you to understand your complete financial picture by providing a comprehensive snapshot of all areas of your financial life. Planning and preparing in advance and implementing solutions to assist you in reaching your personal financial goals can help you to ride out volatility cycles without derailing your long-term objectives.

2. Advisory Team: A professional financial team can help you through the planning process and can recommend tactical opportunities to help keep your plan on track during volatile times. Your team can provide guidance and objective advice to help prevent you from making emotionally-driven decisions.

3. Investment Allocation: Reviewing your overall asset allocation, time-horizon and risk tolerance with your investment advisor prior to and during challenging market environments helps to ensure you are properly diversified and that your cash-flow needs may be met. Your advisor also can keep you focused on your ability to achieve longer-term goals rather than the ups and downs of the market.

4. Cash Flow Modeling: Having data and analysis to support your spending and cash flow needs in any market cycle may provide great comfort. These models can be designed to account for market swings and show the overall impact to your plan in different market cycles. Knowing what action you may have to take and to what degree puts the power back in your hands.

5. Insurance, Estate and Legacy: Having a pool of assets for meeting cash flow needs, whether in the form of cash in an emergency fund, life insurance or long-term care insurance can provide comfort that you are protected when unexpected life events happen. Your planning specialist, working with your legal and tax advisors, can help you develop a plan that ensures assets intended for your heirs and charity are available for them and not spent on health or market contingencies. Such planning can ensure that market volatility will not affect the value of this pool of assets and having that sense of security provides comfort.

Five actions to consider

Markets rebound after downturns. Investors who pull out of the market in a panic tend to miss out on the recovery by waiting to reinvest until “it feels better” and stock prices have already significantly rebounded. A wealth plan curbs these tendencies, because it can alleviate fear of the unknown—fear that your goals won’t be met.

Additionally, it is important to remember that a dollar lost in a diversified portfolio may be temporary while a dollar lost to overpayment of taxes—due to poor tax planning, unnecessary fees in your portfolio, or extra-budgetary spending—may be permanent. Acknowledging that market fluctuations will happen and knowing that you are prepared regardless can help you stay the course and not defeat your own goals through fear and panic. With this in mind, here are five actions to consider taking in the short-term to help you in attaining your long-term goals:

1. Put Cash to Work: Down markets present opportunities to buy equities at lower prices. Historically markets increase over time after dips and even recessions. If you invest in a diversified portfolio when the overall market is down, you may receive more shares for your dollar. Moreover, if you have a reasonably long time horizon, the portfolio value should ultimately appreciate over time if properly diversified to minimize risk. Since markets are unpredictable, dollar cost averaging—the process of investing a set dollar amount over time—allows investors to buy fewer shares when markets are “high” and more when markets decline. A periodic investment plan such as dollar cost averaging does not assure a profit or protect against a loss in declining markets. Since such a strategy involves continuous investment, the investor should consider his or her ability to continue purchases through periods of low price levels.

2. Rebalance: If market fluctuations have caused your asset allocation to be out of line with your investment time horizon for specific goals and the amount of risk you are prepared to take to reach those goals, rebalancing your portfolio may help you get back on track.

3. Tax Loss Harvesting: When market volatility results in investment losses, these losses can be “harvested” by selling the securities and replacing them with similar securities to maintain your optimal asset allocation. These losses can then be applied to offset capital gains elsewhere in your portfolio and certain amounts of ordinary income, resulting in a potentially decreased tax bill for the year. As tax rates increase, these losses become even more valuable since unused capital losses can be carried forward indefinitely. It is worth noting that the IRS disallows losses if the same or “substantially similar” securities are purchased within thirty days (before and after) the date of their sale. Your investment advisor can help you determine which securities to sell that may help you capture market losses.

4. Roth IRA Conversion: Traditional IRAs and Roth IRAs are both retirement accounts, but are subject to different tax treatment. Most withdrawals from Traditional IRAs are subject to ordinary income tax rates, whereas Roth IRA assets can be withdrawn entirely tax-free once certain qualifications are met.

If you hold assets in a traditional IRA, you can opt to convert the traditional account to a Roth IRA even if you are not eligible to contribute to a Roth IRA due to IRS income limitations. Traditional IRA distributions are taxable at your ordinary income tax rate, so if you anticipate being in a lower tax bracket in retirement, a conversion may not make sense. If, however, you are a real estate investor receiving rental income, for example, or your income is derived primarily from dividends or other passive income, you may not anticipate a significant reduction of taxable income in retirement and a conversion may make sense. The Roth IRA conversion permits you to pay tax now on the current value of your assets instead of paying taxes on future distributions. When market values are depressed, the tax cost of conversion may be lower. Also, paying the tax now allows the assets to appreciate over time, with no income taxes paid when the assets are withdrawn.

Roth IRA Conversions are not suitable for all investors. Please ensure to consult with your tax and legal advisors regarding your specific situation and before taking any action that may have tax or legal consequences. Traditional IRA distributions are taxed as ordinary income. Qualified Roth IRA distributions are not subject to state and local taxation in most states. Qualified Roth IRA distributions are also federally tax-free provided a Roth account has been open for at least five years and the owner has reached age 59 1/2 or meets other requirements. Both may be subject to a 10% Federal tax penalty if distributions are taken prior to age 59 1/2.

5. Make Gifts: In 2016, each person can make gifts of up to $14,000 per year per recipient and $5.45 million over the course of a lifetime without incurring gift tax on the transfer. Making gifts of investments that have decreased in value due to market volatility allows you to transfer more of your assets before recognizing gift tax on the transfer. This can be beneficial if your estate is likely to be subject to estate tax, because those assets can continue to grow outside of your taxable estate, sheltering future appreciation from estate taxes.

Experiencing market volatility can be unnerving. However the fear of the unknown is worse than knowing what action to take. Having a well-thought-out wealth plan can provide you with a clearer understanding of whether you should stay the course or take action. You may even find that challenging market conditions offer long-term planning opportunities that you can use to your advantage. Please reach out to your relationship manager or wealth planning specialist to discuss your situation.