5 Things Investors Should Do Now

Recently I read a beautifully written article by WSJ’s Jason Zweig entitled 5 Things Investors Shouldn’t Do Now.  So, I thought I’d piggy back on that idea and express what I feel investors should do now.  These are steps that can be taken by any investors at any level.  So here goes…

1) Deploy additional capital.  As an advisor, this may seem a little self-serving but hear me out.  In nearly all my client interactions the less intuitive reaction is to write contribution checks, rather than to sell current holdings.  Cashing out in market slides is one of the major reasons for under performing the market over the long term.  Most investors would agree they are in it for the long haul, but frequently exhibit “short-term” investing habits.  The smart thing to do is to find capital to contribute to your investment accounts.  Where to find this extra capital?  I made reference to a possible source inside your current portfolio in my last posting.

2) Buy on the down days.  This is a saying I first heard coined at my firm, but essentially has the same effect of systematic purchasing.  This is probably better known as dollar cost averaging.  Putting your capital to work in existing positions (or new ones) while the market is falling can be a great way to outperform over the long term.  Needless to say, the purchases need to be part of a complete investment plan which takes into consideration your risk and return objectives.

3) Set an appointment with your advisor to stress test your portfolio.  Most experienced advisors can conduct this exercise for you that will give you a “worst case scenario” that may go a long way to alleviate any anxiety you’re feeling about market volatility.  This is an exercise that I has proved very helpful for our clients.  Some advisors may be even inclined to backtest your current investment strategy to see how well it has held up in the worst markets and provide advice on adjustments.

4) Build a rainy day fund.  Possibly one of the most comforting things in volatile markets is knowing that everything isn’t invested.  Having a “safety” bucket of assets that are in cash or cash equivalents (12 months is typically fine) goes a long way to help ease the mind.  Consider that this bucket is designed for risk management and insurance, so it won’t pay huge cash dividends, but will make up for it with the peace of mind it provides.

5) Plan a trip.  Take your mind off your investments and plan some time to enjoy the fruit of your labor.  Often market corrections don’t continue on for weeks save a few exceptions.  It is reasonable to assume that before you realize, your accounts will be back in the green territory.  If you’ve hired a team to manage your investments let them do their job and go take a well deserved vacation (or staycation!)

If you’ve worked hard and stuck to a good investment plan for most of your life, chances are you will be just fine.  More often than not, investors that make habit of tried and true principles end up being successful.  Fully acknowledged, no one likes down markets or extreme volatility (especially us advisors!), but we understand this is part of market cyclicality.

Remember that one of the best trades of Sir John Templeton’s investing career was made by investing during the Great Depression and exploiting market pessimism only to see those investments soar by the start of World War II.   I think an appropriate axiom of his to embrace during market volatility is:

“If you want to have a better performance than the crowd, you must do things differently from the crowd.” 

Happy Investing!

Is Tax Loss Harvesting an Oxymoron?

In grade school oxymoron was one of those words that could make you giggle after someone uttered it.  If I heard any word with “moron” in it, it sent me chuckling, so maybe that was just me.

Funny though, I find that often enough individuals focus too intensely on “part” of something and miss considering the “whole” meaning.  In a lot of cases, the more powerful overall meaning is what needs the intense focus.  So before we let our human filters get in the way, let’s take an undercover peek at an age-old trick that has been used by the investing elite for years.

Each year, thousands of investors take losers in their portfolio (valued at less than purchase price) and sell them to generate losses–on purpose!  This practice of “tax-loss harvesting” (or tax loss selling) can add extra juice to your investment portfolio.  Also, it is not as insane as you think as it can set in motion a few important benefits:

First, it frees up capital in your portfolio that can be used to rebalance it.  Too often we let our winners ride so long that it creates portfolio imbalance.  Psychologically, everyone likes to look at the asset that is up 200% while ignoring the one that is down 50%.  However, once you sell that loser in your portfolio, simultaneously you generate cash that can then been used to rebalance across all your asset classes.  So let’s say you have a really good year in bonds but your emerging equities have done poorly, sell some of each asset class and get back in balance and offset some of the tax liability–(see my next point!)

Secondly, it locks in losses that can be used to offset either long term or short term gains (or both!).   The combination of selling parts of your portfolio that are at a loss along with your winners can essentially create a neutralizing effect which lowers your tax liability.  With short term gains taxed at 20% for the highest earners (at the time of this writing) it makes sense to offset some of those gains since you are only keeping 80 cents of every dollar you make in gains.

Lastly, it presents an opportunity to buy assets on the cheap.  One other aspect of this strategy is that assets are generally on sale during this time of the year which can start as early as mid-October and run through year-end.   Why?  Because institutional asset managers are human too and they usually engage in “window-dressing” or “tax incentive selling” by selling losers and buying momentum assets prior to posting year-end performance numbers.  This is an opportunity to buy assets that are usually depressed due to momentum selling.

So now you have a general idea of what tax loss harvesting is.  Here are some suggested next steps to take advantage of any opportunities in your taxable investment portfolio:

  1. Grab last year’s tax return and look at line 13 from your 1040.  This number needs to be reviewed along with your schedule D.  Why?  Because any positive number adds to line 22 on your return and increases your tax liability.  Thus, it makes sense to find ways to lower it!
  2. Grab your last brokerage account statement for your taxable account(s).  Compare you current percentage in each asset class versus the target percentage.  If you don’t know this answer, set an appointment with your financial advisor to rebalance your portfolio!  If you are out of balance in any asset class these are prime candidates for harvests.  Consult with you financial advisor about what to sell and when to sell.  Hint:  Typically speaking you want to start the process before everyone else does.
  3. Learn more and ask a lot of questions.  This is not rocket science, but you will be a better steward over your wealth by understanding the value of strategies like this.  Consult with a financial advisor that will act as a guide providing sound, objective advice.

Going Further: