Go Ahead, Take the Next Step

October 20, 2022

A client reached out this week, expressing concerns about the decline in her portfolio. As I started to provide my rationale for staying the course and how markets go thru cycles, etc. , she said “thanks, I just need the hang in there pep talk once in a while.” Don’t we all?

It has been challenging to be a long-term investor this year and while the past week has brought some relief, it remains a heavy environment.

So when I came across this quote today (in James Clear’s weekly 3-2-1 newsletter), it occurred to me that instead of a simple pep talk, perhaps it would be helpful to focus this week’s column on a few actionable steps you can take right now, despite the reality we find ourselves in. Here’s the quote:

Without altering the facts of the situation I am facing and without ignoring the reality of what must be done, what is the most useful and empowering story I can tell myself about what is happening and what I need to do next?

Here’s a list of six actionable steps you may wish to consider:

1.) Engage – Trust me, I know it is easier to simply not look at your investment accounts right now. (And if you know that you simply can’t do so without getting too emotional and/or taking undue action as a result, then continue to steer clear. You do you!). However, if you have the fortitude for it and are able to stay calm, engage with your portfolio. Review your allocation. Harvest tax losses. Consider adding candidates that are on your “shopping list.” Revisit asset classes that now have return potential (ie: cash and fixed income). Assess your savings levels vs. 2022 goals/targets. Your current portfolio is the reality – don’t miss this opportunity to make smart moves simply because you aren’t looking

2.) Revisit cash – Famed hedge fund manager Ray Dalio famously coined the phrase “cash is trash” years ago. He recently took those words back! We’ve always believed there is a role for cash – especially when it comes to building up reserves/emergency funds that are designed to insulate you for unexpected expenditures and more importantly – keep you from withdrawing from investments at the wrong time.

And with the rise in interest rates, cash can now play a role in portfolios as well. Now is a great time to reassess your cash level. Do you still have adequate reserves (see our article on this topic here)? And with the rise in interest rates, there are nice yields to be earned once again on these funds (see our article on money market funds here). Take action to ensure you are benefiting from the rise in yields!

3.) Consider taxes – A down market is a terrible thing to waste. As noted above, once you engage with your portfolio, you may notice you now have unrealized losses in taxable accounts. You can realize those losses by selling the positions (proceeds can be reinvested, just watch wash sale rules). Consider doing this in near future as certain mutual funds may be preparing to pay out meaningful capital gain distributions (which tend to increase in volatile years) – and by selling in advance, you can take the full loss. These losses can offset current year (or future) capital gains and/or mutual fund gain distributions

4.) Confirm your debt payment approach – Up until this year, it was very likely that almost every kind of debt carried an interest rate that exceeded those available on savings. Now, that dynamic may have shifted. While there are many factors to evaluate when considering whether or not to prepay/payoff debt, one thing you should do is compare interest rates.

As an example, for many people (especially those that purchased a home or refinanced during 2020 – 2021), their mortgage rate is now meaningfully below the rate they can earn on many risk free investments (like cash or short term fixed income). Take stock of what you’re paying on debt versus what you can earn on investments/cash – and make adjustments to any prepayment plans as necessary (note: we are talking about extra payments (ie: prepayment) – NOT scheduled/required payments. Always make the scheduled payment!)

5.) Roth conversion – We wrote about Roth conversions at length here. This is a complicated topic that should be well thought out. However, a down market is an excellent time to give it some more thought (as you are taxed on the account value at time of conversion – and that account value may be meaningfully lower this year that in recent past). Work with your financial advisor and tax advisor prior to year end if you think this could be a good strategy for you

6.) Focus Forward – Perhaps the best step you can take is to turn your attention in the proper direction. Resist the urge to second guess yourself and look backwards for too long (learn from it – and move on). Forward is our only option. So, turn your gaze that way, take as many steps as you can, and take comfort in the fact that we have endured every bear market before this one. No reason to think this time will be any different.

I’ll see you all on the stairs, taking that next step, one at a time, right beside you.

Onward we go,

Note: All commentary above is as of the date of this post and is for education and informational purposes only. Windermere and its principals do not intend for this to serve as investment advice and are not responsible for any actions taken based on this article. Consult your financial advisor before taking any actions as it relates to your own investment portfolio

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