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Financial Planning Insights from Bob Dockendorff JD, LL.M



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Moves to Make During Down Markets

Take Advantage of A Temporary Drop In Asset Prices

It’s definitely hitting the fan out there. The virus has hit almost every asset class and nothing is safe other than cash. Even bonds are selling out.

This is the proverbial “Black Swan Event” that, no doubt, creates a sense of panic every time we look at the markets.

But you should look at this as a temporary downturn in financial assets.

In all honesty, this one feels extra scary because it’s being caused by a force of nature. This isn’t like the 2008 financial crisis where a moral hazard within our created poor practices throughout the economy, which blew up in our face. Nor is it the greed and jubilation that created the dot com crash of the early 2000s.

Those two crashes were caused by something inherently…economic.  

This time, we’ve essentially halted all human interaction and frozen commerce while we fight something completely out of our control. Even our government bailouts (which we probably can’t afford) can’t really solve the underlying crisis here. Money can be used for medical treatment or to cover needs in a downturn, but we can’t buy our way out of a pandemic.  

While the distinction is interesting, one thing I’m not saying is….THIS TIME IS DIFFERENT! That’s not the path we want to go down. Each crisis is different in its own way, but in one core way this crisis is not different. It will work itself out eventually, and the economy will endure. 

On the more positive side, we could arguably look at the situation like this: The economy, which was doing pretty well, is taking an a beating it didn’t deserve. Commerce is on freeze, and financial assets are worried. Maybe the decline in financial assets is overblown?

Either way, ultimately every crisis creates a temporary depreciation of assets. A good investment plan calls for this to happen every decade or so. This shouldn’t change how you manage your investments.

Just remember these few things:

You still own just as many shares of stock as you did before the crash. Remember looking at your 401(k) in January of 2020 and saying “It’s up to like (some amount of dollars)”. It really wasn’t. You just had x amount of shares that, at that time, could be exchanged for x amount of dollars. Imagine you owned ten two family homes that you weren’t intending to sell for twenty or thirty years. They were owned outright, mortgage free, and paid for themselves. Then 2008 happened. They declined in value, on paper, by 50%--but otherwise have been great investments for a long time. Would you want to sell now, or buy more?

This Can Present A Great Opportunity: Downturns are when things get reshuffled. While many bad companies are exposed, great companies are also unduly penalized for things outside their control. When this happens there is a window of opportunity to buy great assets at a discount. This is one of those opportunities.

Keep a Long Term View: The stock market has always made money over the long term. Understand your risk tolerance and keep enough liquidity to fund your lifestyle, but otherwise stick to your plan. 

Here are a few moves to make in your portfolio:

  1. Harvest Tax Losses

I’ve written about tax losses extensively here, and here. The core concept is that you can capture a tax loss to use against gains elsewhere, without having an economic loss. 

Equity investments funded within the last two to three years are now likely showing a loss position. This is a good time to harvest tax losses in your accounts to shield against future gains. The benefit is to generate a capital loss, while remaining invested in the market to avoid missing any rally. This strategy is difficult when positions are concentrated in individual stocks, but very simple for asset allocators that invest mainly in mutual funds, index funds, and ETFs.

Suppose you purchased $100,000 of Vanguard Total Index Fund (VTI) last year, which has exposure to the broad US equity market. Right now it’s worth $85,000, showing a loss of $15,000. You could sell this position and “swap” it for a fund with virtually identical exposure like iShares Total US Market (ITOT). 

After the two trades (sell VTI, with proceeds buy ITOT), you have kept market exposure, but generated a $15,000 capital loss that you can use anywhere you like against other capital gains already realized (company stock, somewhere else in the portfolio, etc.).

If you don’t have capital gains, you can take $3,000 right now against ordinary income, and use the rest later. This is a move to lower your tax bill. 

Note: Avoid the wash sale rule—do not buy back a substantially similar investment within 30 days, the IRS will disregard your loss in the “Wash Sale Rule”.

To be extra careful, if you’re selling out of a “total market” fund, you could simply buy multiple funds as replacements that in total constitute similar exposure. In the example above, you could replace VTI with and iShares large, mid, and small cap fund.

  1. Rebalance to Target Equity/Fixed Income

This one may sound a bit drastic, but it’s what you have to do. For the last ten years equities have been swelling out of proportion in accounts, and hopefully everyone has trimmed small profits along the way. Now…..we have to do the opposite. Sure, this seems counterintuitive. Why would we sell bonds now and invest in equities?

Because it’s in the plan that accounted for this situation, and the plan calls for exactly this move.

An account that was 70/30 equity/fixed income in early 2020 is now totally out of balance. Towards the end of the quarter it would make sense to bring the account back to 70/30. If there’s new cash available it should follow the investment plan. Don’t get squeamish!!

Easier said than done…

About the Author

Robert E. Dockendorff, JD, LL.M

Robert E. Dockendorff, JD, LL.M

Robert Dockendorff is a Vice President of Claro Advisors, LLC. Bob serves as an Advisor at Claro, where he helps clients achieve financial goals through careful analysis and the development of long-term plans that encourage consistent, achievable actions. Bob also enjoys sharing helpful financial planning insights on his blog and is an active contributor on Investopedia's Advisor Insights website.

Prior to joining Claro, Bob was a Senior Associate Financial Counselor at The Colony Group, supporting a team of financial counselors with research and analysis on all areas of wealth management and financial planning for high net worth individuals. He also focused on the implementation of investment, estate, and tax planning tailored to the specific goals of diverse clients. Prior to joining The Colony Group, Bob worked as a Tax Associate at the international accounting firm Ernst & Young, where he conducted tax research for multi-national businesses. Bob received a Bachelor of Arts in Philosophy from the University of Vermont. After college, Bob earned a Juris Doctor from Suffolk University Law School, Cum Laude, and an LL.M in Taxation from Boston University Law School. Bob has previously passed the FINRA Series 65 and the MA Life and Health Insurance Producer Exam. In his spare time, Bob enjoys the mountains, the beach, and playing golf. Bob resides in Hingham, MA with his wife Caitlin and two sons, Charlie and Tommy.

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