The spread of Coronavirus and its impact on the global stock market, supply chain, and unemployment are dominating the headlines right now. During periods of high market volatility, short-term negative impact to your investment portfolio can be unnerving, but there are also some planning opportunities that could allow you to take advantage of the situation and do not require you to make significant sacrifices in your investment portfolio. Here are some Silver Lining/planning strategies to consider:
If you have securities that have gone down in value, you may be able to sell those at a loss, which can reduce your tax liability. You may be able to find another suitable position to invest your money so you aren’t missing out on participating in the market.
Reduce or Diversify the Risk of a Concentrated Position
Perhaps you inherited a significant stock position, acquired stock when you sold a company, or worked for the company over many years. If one stock comprises 10% or more of your portfolio your wealth may be too concentrated and therefore overly subjected to the risk from the ups and downs of a single company. Concentrated stock positions are a big gamble. You may be able to reduce your exposure with fewer tax consequences during a market downturn than you would have been able to while the markets were at their highs.
Shop the Bargains
Remember that you have a plan; a long-term plan. Depending on your situation and tolerance for risk, if you’re focused on the long haul it can be a good time to look for buying opportunities because the price of good companies gets hammered down along with the poor companies and may be sitting at very attractive valuations. Rebalancing your portfolio during a market downturn may create additional return potential and lower volatility.
Refinance your mortgage
A byproduct of a market decline is that interest rates continue to be low. As of the writing of this article, market factors have caused a surge in refinancing applications exceeding lenders’ capacity levels. As a result, rates have not stayed down as one would expect. Nevertheless, it would be worthwhile to get on your lender’s refinance list. Hopefully when they do reach out to you, rates will be lower than your current rate. If so, over the life of the loan, this could result in meaningful savings for some borrowers where this is applicable.
For Example: If you have a 30-year mortgage on a $600,000 home at 4.25% you could save $340 per month ($4,080 per year) on your mortgage payments if you refinanced the $600,000 at 3.25% over thirty years. Over a full 30-year mortgage you could save $122,000 in interest payments if your rate was 3.25% vs. 4.25%.
Rev Up 529 funding
This strategy may make sense for those that are funding 529 plans for a child or grandchild who is very young. If the beneficiary has many years before they’re expected to need the money, you could lump several months’ or years’ worth of contributions during market downturn if you believe market conditions will improve, though this strategy would need to be balanced by your cash and liquidity needs.
Uncle Sam Can Wait
On March 21st, 2020, the Treasury Department and Internal Revenue Service announced that the federal income tax filing due date is automatically extended from April 15, 2020, to July 15, 2020. Taxpayers can also defer federal income tax payments due on April 15, 2020, to July 15, 2020, without penalties and interest. We recommend consulting with your tax advisor to determine the right strategy for your tax circumstances.
Even a small amount can go a long way, especially now. If you take the standard deduction on your 2020 tax return (the one that you’ll file in 2021), you can claim a brand new “above-the-line” deduction of up to $300 for cash donations to a qualified charity for 2020. Normally, you must itemize on Schedule A to get a tax break for charitable donations, but not this year.
Important Notes: Donations to a Donor Advised Fund are not deductible. Additionally, if you itemize, you cannot take this new deduction.
These are just a few ideas that may be helpful for investors looking for some “silver lining” in a market downturn. At Modera, we’re here to help you examine all the possibilities, keeping in mind that each situation is unique. If you’d like to discuss any of these strategies, or have any other questions regarding your financial life, please contact us.
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This article is limited to the dissemination of general information about Modera’s investment advisory and financial planning services that is not suitable for everyone. Nothing herein should be interpreted or construed as investment advice nor as legal, tax or accounting advice nor as personalized financial planning, tax planning or wealth management advice. For legal, tax and accounting-related matters, we recommend you seek the advice of a qualified attorney or accountant. This article is not a substitute for personalized investment or financial planning from Modera. There is no guarantee that the views and opinions expressed herein will come to pass, and the information herein should not be considered a solicitation to engage in a particular investment or financial planning strategy. The statements, information and opinions expressed in this article are subject to change without notice.
Investing in the markets involves gains and losses and may not be suitable for all investors and should not be considered a solicitation to buy or sell any security or to engage in a particular investment or financial planning strategy. Individual client asset allocations and investment strategies differ based on varying degrees of diversification and other factors. Diversification does not guarantee a profit or guarantee against a loss.