How to plan financially with volatile investment markets

By Philip Herzberg, CFP

In the current economic climate, there are many uncertainties – inflation at its highest level in four decades, rising interest rates and supply chain issues, to name a few. These uncertainties led to a rapid decline in stocks and bonds, leaving investors with few places to hide from market volatility.

Philip Herzberg

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

Pay off costly debt and build emergency savings

Reduce costly credit card debt, as well as other variable rate balances, and boost emergency savings. These two steps will help you weather rising interest rates and economic uncertainty. Rising interest rates mean that borrowing costs more. Consider calling the credit card issuer to consolidate balances or ask for a lower rate. Pay off high-interest credit cards with a low-interest home equity loan or opt for an interest-free balance transfer credit card. Identify outstanding student loans and determine if refinancing makes sense.

Make sure the money you have in emergency savings earns higher interest rates. Set aside 12 to 24 months of living expenses in cash reserves to tide you over in the event of an unexpected medical emergency or layoff. It gives you more time to strategize after a job loss, rather than feeling the pressure to take your first job offer to cover the bills.

Consider the Roth IRA Conversion

The recent stock market downturn has made the Roth IRA conversion more attractive to those who are well positioned to take advantage of this strategy in a historically low tax rate environment. A market decline allows 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 recovery of the stock market. Another incentive for Roth conversion is a lower tax bill, as the liability for a conversion will be less expensive now than it was when markets were higher.

Leverage the harvest of tax losses to reduce the tax bill

Take advantage of the tax loss harvest to stay invested in current markets and sell stocks or assets that have fallen in value. Thereafter, the losses can be used to help offset capital gains tax. If losses exceed annual gains, investors can use the remainder to offset up to $3,000 of ordinary income, such as compensation, from federal taxes. Any remaining losses can be carried forward to future tax years, to offset capital gains or ordinary income.

Boost your retirement savings

Continue to fund your tax-efficient retirement accounts. Market pullbacks are an opportunity to direct positive cash flow to buy stocks at discounted prices. Increase or maximize contributions to your 401(k), as well as your IRAs and Roth IRAs, for long-term investment growth. Don’t be tempted to sell retirement account stocks that have fallen in value.

About the Author: Philip Herzberg

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