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How to Financially Plan with Volatile Investment Markets

Here are four proactive planning moves you should consider.

By Philip Herzberg, CFP

In the current economic climate, there are many uncertainties — inflation at a four-decade high, rising interest rates and supply chain issues, just to name a few. These uncertainties have resulted in stocks and bonds rapidly declining in lockstep, leaving investors with few places to hide from the market volatility.

Philip Herzberg, CFP®, CDFA®, CTFA, AEP® is a Lead Financial Advisor at Team Hewins, a wealth management firm with offices in South Florida and the San Francisco Bay Area.

Philip Herzberg

The best protection from this volatility is to stick to your long-term financial plan. Here are four proactive planning moves to consider now.

Pay down costly debt and build emergency savings

Pare back expensive credit card debt, as well as other variable rate balances, and fortify emergency savings. Both steps will help you to withstand rising interest rates and economic uncertainty. Surging interest rates mean borrowing costs more. Consider calling the credit card issuer to consolidate balances or request a lower rate. Pay off high-interest credit cards with a lower-interest home equity loan or switch to an interest-free balance transfer credit card. Identify outstanding student loans and determine if refinancing makes sense.

Be sure that the cash you have in emergency savings is benefitting from higher interest rates. Stash away 12 to 24 months of living expenses in cash reserves to tide you over in the event of an unexpected medical emergency or job layoff. That gives you more time to strategize a next career move after a job loss, rather than feeling pressure to accept your first job offer to cover bills.

Consider Roth IRA conversion

The recent stock market downturn has made the Roth IRA conversion more appealing for those who are well-positioned to take advantage of this strategy in a historically low tax rate environment. A market decline enables investors to convert more assets and enjoy tax-free growth, as well as possible tax-free distributions in the future, inside the Roth IRA with the eventual stock market recovery. Another Roth Conversion incentive is a lower tax bill, as the liability for a conversion will be cheaper now than it had been when the markets were higher.

Leverage tax-loss harvesting to lower tax bill

Take advantage of tax-loss harvesting to stay invested in the current markets and sell some stocks or assets that have declined in value. Subsequently, the losses can be used to help offset capital gains tax liability. If losses exceed annual gains, investors can utilize the remainder to offset up to $3,000 of ordinary income, such as compensation, from federal tax. Any losses left over can carry forward to future tax years, to offset capital gains or ordinary income.

Boost retirement savings

Continue to add to your tax-advantaged retirement accounts. Market downturns are an opportunity to direct positive cash flow to buy stocks at discounted prices. Ramp up or maximize contributions to your 401(k)s, as well as your IRAs and Roth IRAs, for long-term investment growth. Do not be tempted to sell retirement account stocks that have fallen in value.

About the author: Philip Herzberg

Philip Herzberg, CFP®, CTFA, AEP® is a lead financial advisor at Team Hewins, a wealth management firm with offices in South Florida and the San Francisco Bay Area.