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Bear Market: Have you considered doing this?

Bear Market Investment Strategies

We have reached a Bear Market and there are several strategic investment strategies that all investors should consider during a Bear Market such as rebalancing, tax loss harvesting and Roth IRA conversions (see below for a brief explanation of each).  

  • Rebalancing – Shifting now overweight cash and bonds in your portfolio into stocks that are now “On Sale,” bringing your portfolio back into balance at a risk level that you are comfortable with.
  • Tax Loss Harvesting – In general, selling depreciated stocks and mutual funds during a Bear Market is not recommended, however, selling at a loss can potentially lower your tax bill and should always be evaluated, even during a Bear Market.
  • Roth IRA Conversions – The ultimate goal of Roth IRA conversions is to pay less taxes.  With the recent market declines, the value of your mutual funds has likely decreased.  These funds can be moved from your pre-tax qualified accounts such as an IRA or 401(k) to a Roth IRA or Roth 401(k) account.  The potential benefit of doing this conversion now is that you can move these funds at a lower value, pay taxes now on the lower value, and then allow the funds to recover their value and hopefully continue to grow in your Roth IRA.  The recovered value and all future growth will be tax free!

Most of these strategies are common to financial advisors and it is likely your advisor will evaluate these strategies for implementation across your investment accounts.   Keep in mind, implementation of these strategies is not always appropriate or may not be feasible for your unique financial plan.  

Have you considered doing this during a Bear Market?

Much like the above strategies are worth investigating, have you considered doing this during a Bear Market; GETTING A SECOND OPINION of your current investment/financial plan?   You may be happy with your current advisor and your long-term investment results, that is great!  But at what cost?  Do you know exactly what you are paying your advisor?  Do you know the expense ratios of the mutual funds you are currently invested in?  Do you know how those costs compare to other advisors?  Both of these costs can vary significantly from advisor to advisor and from fund to fund.  Higher costs do not necessarily mean better investment returns or better service.   With respect to investment returns, research has shown that higher cost funds, on average, do not perform better than lower cost funds over long periods of time (10+ years).  

One thing is for certain, higher costs do have a negative impact on your long-term investment success.  What if you could save 0.5% or more?  What would 0.5% savings add to my portfolio over time?  The answer depends on your expected returns.  Using simplified calculations with a 10% annualized return and saving 0.5% on a $100,000 portfolio would save you more than $10,000 over a 10-year period.  The savings would be greater than $56,000 over 20 years.  Those savings double if you have a $200,000 portfolio and continue to increase with the value of your portfolio.

Once you understand what you are paying for your investments and how that compares to another advisor, the next question to ask yourself is “What level of service am I getting for the cost I am paying?”  In other words, are you receiving comprehensive financial planning from your advisor?  In addition to investment management, are you also getting retirement planning, income tax planning, insurance planning, estate planning, employee benefits analysis and more?   These comprehensive services are often included as part of the advisor fee that a fee-only, fiduciary financial advisor charges, whereas some advisors only provide investment management services to their clients.  Make sure you understand the level of service that you are receiving from your current advisor.  Often times, even with the additional services provided, fee-only advisors are cost competitive and charge less.

The bottom line is this, choosing a financial advisor is a very important decision.  Just like getting a second opinion for a medical procedure,  getting a second opinion of a financial plan can provide peace of mind in knowing you made a good decision and that the fees you are paying are fair for the service you receive.  And for most people, gaining a little peace of mind during a  Bear Market can go a long way to helping  you relax and feel confident in your long-term investment plans.

At Fortress Planning Group, we are always happy to provide a free second opinion of existing financial plans.  We are a fee-only, fiduciary firm that provides comprehensive financial planning services to our clients.  Through the use of technology, we are able to work virtually with our clients who are spread out across the United States.  We are also able to meet in person at our Wisconsin offices.   Whether you reach out to us for a second opinion or another advisor in your area, we recommend pursuing a little peace of mind to help you navigate through this Bear Market.

Written by Kevin Sandieson, Financial Advisor and Partner at Fortress Planning Group