Market Correction Checklist

It’s official. If you haven’t heard already the S&P 500 officially closed last Monday in Bear Market territory. Bear markets are typically defined as a decline of at least 20% from a recent high. Stocks have been falling AND bonds have been falling AND meanwhile prices are rising and things feel bad. It is easy to think that things may get worse (and they very well could) and you want to do something about it. This is a perfectly normal reaction. When faced with something painful, we look for ways to ease the pain. While such a response serves us well in many areas of life, investing is not one of them. Why? Because historically, markets have demonstrated that the best time to buy (or sell) is when the opposite action would feel most comforting. As John Bogle (Founder of Vanguard) once said: “don’t do something, just stand there!” Given the risk of a timing error, the hurdle for any action you take during periods of high volatility should be VERY high. That means having a strong, evidence-based rationale for any investment change you make. If you can’t clearly explain your process or edge in making a buy or sell decision, then there’s likely no justification for doing it. That’s especially true when you’re under duress, with fear clouding your thinking. A downturn in the market causes lots of anxiety for investors, but it also creates financial planning opportunities. If you are feeling like you want to do something, try to do something productive. Here’s a checklist of things to consider:


1. Roth Conversions Given the current tax reprieve that is due to sunset in 2025, Roth conversions were an attractive strategy before the downturn–the opportunity has simply been amplified. If you convert an asset that has lost 20% to 30% of its value, you can save a significant amount in taxes once the asset recovers.


2. Accelerating Your Account Contributions If you’re still working, you should consider accelerating your yearly contributions to several retirement-savings or investment accounts while the market is down. Start by taking an inventory of your accounts and familiarize yourself with their respective yearly limits and flexibility of investments. Look for defined contribution plans, such as a 401(k) or 403(b), Individual or Roth IRAs, and Health Savings Accounts (HSAs) to identify the best opportunities for increased savings and investment options.


3. Tax-Loss Harvesting & Rebalancing The longest bull market in history–recently deceased thanks to the current market volatility–created a lot of wealth for many Americans. But it also created significant tax consequences for investors who did not have any tax-losses to carry forward. These individuals found themselves faced with unwanted and, in some cases, unnecessary tax bills. Capturing tax losses today can help offset gains in the future and reduce tax liability for up to $3,000 in non-investment income. We are proactively rebalancing & doing tax-loss harvesting in your portfolio where it makes sense during these turbulent times. This is to assure that your target asset allocation is maintained and to capture tax losses that can help us in the future.


4. Assess Your True Risk Tolerance. Everyone thinks they have a good idea of their risk tolerance until they are punched in the face with a large drawdown. During smooth up markets with only minor pullbacks (ex: 2021), many assume their risk tolerance is higher than it actually is. You can tolerate any level of risk when risk is seemingly absent. It’s only when the correction hits and you can’t sleep at night because your portfolio is down that you begin to understand your true risk tolerance. And when it comes, you’ll probably be thinking in dollars and not percentages. A 50% decline for someone with $10,000 invested early in their career is not going to be viewed nearly the same as a retiree that has $1 million invested. A $5,000 drawdown is more tolerable than $500,000 to almost everyone, even though the percentages are exactly the same. If you would like to discuss your risk tolerance, please give us a call.


As investors we have to accept that volatility is just a part of the game. It comes with the territory. This doesn’t mean that you have to be happy when markets decline. Trust me, we do not enjoy seeing stocks fall. But, we also don’t lose our minds either. Instead we try to see these occasional declines for what they are—risk. And nothing good in life comes without risk. Not love. Not a career. Not a family. Nothing. Neither does building wealth. The volatility of today should pave the way for the growth of tomorrow. That’s what all the historical data suggests. Of course it’s easy to point at charts of years past and say “don’t do something, just stand there”, but it’s much harder to do that while living through times like these. If it were easy, everybody would do it. We believe the ability to stay calm and rational during times like these is one of the primary things that separates the good investors from the bad ones.


Bottom Line: Consider the items on this checklist and give us a call if you would like to discuss whether they are applicable to your financial situation.


As always, thank you for the continued opportunity to serve you and your family.

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