Maintaining Focus and Finding Silver Linings

Integrity Capital Management |

COVID-19 has made life for everyone nothing short of surreal, and the rapid market volatility that has accompanied this pandemic has been both unsettling and historic.

Since the markets rapidly dove into bear territory in mid-March, we have watched worst days turn into unprecedented rallies. Predictions for what happens next are all over the place, and while the pandemic may be “flattening”, there will no doubt be lingering pain for a world economy that was brought to a screeching halt.

This crisis may be unlike the last one, but one thing every crisis has in common is that they have a beginning, middle, and end. From a financial standpoint, what you do during the beginning and middle will dictate your future success when the end does arrive.

Staying focused on the long-term sounds redundant, but it is necessary.  Research shows that we feel the pain of loss much more than we feel the joy of winning or gaining. It’s called “loss aversion”, and it causes an emotional response that may prompt us to do irrational things that go against the strategic plans we laid out when things were less emotionally-charged.

Part of our role as financial advisors is to provide discipline, and we do that by being proactive versus reactive. Below are a few “silver linings” to consider.

TAX LOSS HARVESTING  Downturns can present opportunities for tax savings so we have been looking at  non-qualified accounts to do some tax loss harvesting. By selling positions at a loss, a tax-loss carryforward can be built up for use in future years in addition to a $3000 loss couples can recognize each year. These carryforward losses can be very valuable when and if equities need to be sold at a gain later on.

ROTH CONVERSION  Now might be an excellent time to weigh the tax benefits of converting IRA assets to a Roth. Roths are valued because contributions are made after-tax, grow tax-free and after 5 years have tax-free distributions. Roths also do not have RMDs (required minimum distributions). Why convert? If the value of your IRA is now lower, the tax hit on what you convert is lower and as the assets recover, there is no tax consequence on the appreciation. It is important to have the resources available to pay the taxes on a conversion, and a thorough analysis should be done to determine if it's of value.

REBALANCING  Consistently rebalancing accounts is of particular importance right now. There are some asset classes that have had significant gains (gold, short-term government bonds) and we are taking those and either buying more of what is beat up or creating additional cash for clients taking income.

RMD WAIVER  Part of the CARES (Coronavirus Aid, Relief and Security) Act, waives Required Minimum Distributions for 2020. Not having to take a distribution creates an opportunity for losses to be recovered. If you have already taken your 2020 RMD there may be some instances where it can be reversed. While the CARES Act does not grant a free rollover to everyone for every RMD dollar, subsequent IRS guidance in Notice 2020-51 has further relaxed rollover restrictions. As of this writing, all RMDs taken from January 1, 2020 up to August 31, 2020 can be re-contributed by August 31, 2020