Correction Reminders
By: Cameron Diehl, CFP®
Friends – The new year is off to a rocky start, with equity markets experiencing their first correction – defined as a 10%+ decline - in nearly two years.
As we’ve noted before, there are numerous concerns for investors that are driving markets lower – concerns over inflation, rising interest rates / less accommodative monetary policy from the Federal Reserve, geopolitical tensions, etc. To some extent it may also be that markets have risen so much since the bottom in March of 2020 that they were due for a breather.
Regardless of what you attribute volatility to, the most important thing is how you respond. To that end, I wanted to share a few reminders to help provide context and highlight potential opportunities.
- Remember This is Normal – In his “Ten Themes for 2022” Raymond James Chief Investment Officer Larry Adam noted the likelihood of higher volatility going into this year. He expanded on this idea in a recent update titled “Markets in Transition” noting that “The S&P 500 averages at least one 10%+ pullback per year. In fact, that type of pullback occurs, on average, every 222 trading days. This bull market has not had one since it started—over 450 trading days—so it may be due for a bigger retreat in the near term.” Stocks go up AND down. What’s happening now is normal and to be expected.
- Revisit Your Plan – Whenever you’re feeling unsure about markets, it can be helpful to consider your broader financial plan. It is extremely rare that short-term market movements will impact your long-term probability of success. Keeping in mind your investment strategy and time horizon for your investments can help you stay disciplined and identify opportunities.
- Check For Concentrations – Concentration in investments works both ways – it can feel great as markets are rising and you experience outsized gains along the way, but it can feel equally terrible on the way down when markets fall and you experience even worse results. Knowing how you’re invested and where you may have an overconcentration to a particular asset class, style, sector or even specific company is incredibly important. We have numerous strategies we use with our clients to help manage the risk in these positions (while being mindful of taxes and embedded capital gains).
- Rebalance If Needed – One of the great benefits of a well-diversified portfolio is the opportunity to regularly rebalance back to your target asset allocation. Not all asset classes have performed the same in recent weeks. Rebalancing back to those targets can support a discipline of selling high and buying low.
- Harvest Tax Losses – If you have unrealized losses in your portfolio, tax-loss harvesting can provide a silver lining to offset future gains or even up to $3,000 of ordinary income.
- Put Cash to Work Gradually – To the extent you have sufficient liquidity and want to try and take advantage of a down market, I recommend doing so gradually. It is nearly impossible to time an absolute market bottom, but if you invest available cash incrementally over time it can help diversify your timing and avoid missing out on long-term opportunities.
- Convert to a Roth IRA / 401(k) – Another opportunity in a market pullback is to convert to a Roth IRA / 401(k) at reduced values, thus triggering a lower tax bill. This is a complicated decision but could pay dividends if it fits within your overall plan.
- Review Your Debt – Interest rates are still near historic lows. If you’ve yet to refinance your mortgage or consolidate other debt, it may be worth acting now to capitalize on significant savings before rates rise more meaningfully.
Disclosure: Any opinions are those of Cameron Diehl and not necessarily those of Raymond James. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Past performance may not be indicative of future results. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.
