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How to handle market volatility

Keeping your cool can be hard to do when the market goes on one of its periodic roller-coaster rides. It’s useful to have strategies in place that prepare you both financially and psychologically to handle market volatility. Here are 11 ways to help keep yourself from making hasty decisions that could have a long-term impact on your ability to achieve your financial goals.

1. Have a game plan

Having predetermined guidelines that recognize the potential for turbulent times can help prevent emotion from dictating your decisions. For example, you might take a core-and-satellite approach, combining the use of buy-and-hold principles for the bulk of your portfolio with tactical investing based on a shorter-term market outlook. You also can use diversification to try to offset the risks of certain holdings with those of others. Diversification may not ensure a profit or protect against a loss, but it can help you understand and balance your risk in advance. And if you’re an active investor, a trading discipline can help you stick to a long-term strategy. For example, you might determine in advance that you will take profits when a security or index rises by a certain percentage, and buy when it has fallen by a set percentage.

2. Know what you own and why you own it

When the market goes off the tracks, knowing why you originally made a specific investment can help you evaluate whether your reasons still hold, regardless of what the overall market is doing. Understanding how a specific holding fits in your portfolio also can help you consider whether a lower price might actually represent a buying opportunity.

And if you don’t understand why a security is in your portfolio, find out. That knowledge can be particularly important when the market goes south, especially if you’re considering replacing your current holding with another investment.

3. Remember that everything is relative

Most of the variance in the returns of different portfolios can generally be attributed to their asset allocations. If you’ve got a well-diversified portfolio that includes multiple asset classes, it could be useful to compare its overall performance to relevant benchmarks. If you find that your investments are performing in line with those benchmarks, that realization might help you feel better about your overall strategy.

Even a diversified portfolio is no guarantee that you won’t suffer losses, of course. But diversification means that just because the S&P 500 might have dropped 10% or 20% doesn’t necessarily mean your overall portfolio is down by the same amount.

4. Tell yourself that this too shall pass

The financial markets are historically cyclical. Even if you wish you had sold at what turned out to be a market peak, or regret having sat out a buying opportunity, you may well get another chance at some point. Even if you’re considering changes, a volatile market can be an inopportune time to turn your portfolio inside out. A well-thought-out asset allocation is still the basis of good investment planning.

5. Be willing to learn from your mistakes

Anyone can look good during bull markets; smart investors are produced by the inevitable rough patches. Even the best investors aren’t right all the time. If an earlier choice now seems rash, sometimes the best strategy is to take a tax loss, learn from the experience, and apply the lesson to future decisions. Expert help can prepare you and your portfolio to both weather and take advantage of the market’s ups and downs. There is no assurance that working with a financial professional will improve investment results.

6. Stay on course by continuing to save

Even if the value of your holdings fluctuates, regularly adding to an account designed for a long-term goal may cushion the emotional impact of market swings. If losses are offset even in part by new savings, your bottom-line number might not be quite so discouraging.

If you’re using dollar-cost averaging — investing a specific amount regularly regardless of fluctuating price levels — you may be getting a bargain by buying when prices are down. However, dollar-cost averaging can’t guarantee a profit or protect against a loss. Also consider your ability to continue purchases through market slumps; systematic investing doesn’t work if you stop when prices are down. Finally, remember that the return and principal value of your investments will fluctuate with changes in market conditions, and shares may be worth more or less than their original cost when you sell them.

7. Use cash to help manage your mindset

Cash can be the financial equivalent of taking deep breaths to relax. It can enhance your ability to make thoughtful decisions instead of impulsive ones. If you’ve established an appropriate asset allocation, you should have resources on hand to prevent having to sell stocks to meet ordinary expenses or, if you’ve used leverage, a margin call. Having a cash cushion coupled with a disciplined investing strategy can change your perspective on market volatility. Knowing that you’re positioned to take advantage of a downturn by picking up bargains may increase your ability to be patient.

8. Remember your road map

Solid asset allocation is the basis of sound investing. One of the reasons a diversified portfolio is so important is that strong performance of some investments may help offset poor performance by others. Even with an appropriate asset allocation, some parts of a portfolio may struggle at any given time. Timing the market can be challenging under the best of circumstances; wildly volatile markets can magnify the impact of making a wrong decision just as the market is about to move in an unexpected direction, either up or down. Make sure your asset allocation is appropriate before making drastic changes.

9. Look in the rear-view mirror

If you’re investing long term, sometimes it helps to take a look back and see how far you’ve come. If your portfolio is down this year, it can be easy to forget any progress you may already have made over the years. Though past performance is no guarantee of future returns, of course, the stock market’s long-term direction has historically been up. With stocks, it’s important to remember that having an investing strategy is only half the battle; the other half is being able to stick to it. Even if you’re able to avoid losses by being out of the market, will you know when to get back in? If patience has helped you build a nest egg, it just might be useful now, too.

10. Take it easy

If you feel you need to make changes in your portfolio, there are ways to do so short of a total makeover. You could test the waters by redirecting a small percentage of one asset class to another. You could put any new money into investments you feel are well-positioned for the future, but leave the rest as is. You could set a stop-loss order to prevent an investment from falling below a certain level, or have an informal threshold below which you will not allow an investment to fall before selling. Even if you need or want to adjust your portfolio during a period of turmoil, those changes can — and probably should — happen in gradual steps. Taking gradual steps is one way to spread your risk over time, as well as over a variety of asset classes.

Sincerely,

DC Capital

DC Financial Advisors

 

Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC.  Advisory services offered through Cambridge Investment Research Advisors, a Registered Investment Advisor. DC Financial Advisors and Cambridge are not affiliated.

4 Reasons Your Financial Advisor Should Be Your Tax Planner

Tax planning can transform your finances.

Think about it—taxes follow you wherever you go. You can find them while browsing in the grocery store, buried in your portfolio, coming out of your paycheck, or even just living in your house. Taxes impact nearly every aspect of your life and being conscious of that presence in your financial plan can save you thousands of dollars each year.

A strong tax planning strategy can save you money on retirement withdrawals, keep your investments efficient, help you give more to charity, maximize your estate, and put more money in your pocket.

#1: Your advisor has a comprehensive view and access to your financial life

Most people think about taxes as both beginning and ending on April 15, but that is far from the full story. Preparing your taxes is different than planning for your taxes.

Think about it like this: tax preparation is like the final exam and tax planning is all the studying and work you do to ready yourself for the test. One month of studying likely won’t yield the same results as 11 months of studying. The more time you dedicate to a subject, the more intentional and prepared you will be.

Tax preparation gathers all your information and creates an accurate return for any given tax year. While a vital part of your financial life, it isn’t the same as cultivating intentional tax strategies and implementing them throughout the year to proactively lower your tax bill. Tax planning allows us to plan and execute crucial efficiency strategies on your tax return both now and in the future.

Through tax planning, we can guide clients to make smart choices that have long-term financial impacts both on the current and future tax returns, like devising a tax-efficient withdrawal strategy for retirees. This strategy takes your cash flow, income channels, lifestyle needs, and more into consideration and helps you draw money from the right accounts at the right time to minimize your tax liability.

#2: It can drastically improve your investment strategy

Tax planning can radically enhance your investment approach, making your investments work for you in tax-conscious ways. Below are a few examples:

  • Tax-loss harvesting

  • Asset location

  • Tax-efficient withdrawal strategies

Let’s take a look at how these elements can influence an investment plan.

Tax-loss harvesting allows you to realize a loss while keeping your portfolio fully invested. Recognizing a loss is good for tax purposes because it can offset any capital gains in the same tax year or up to $3,000 in other income. This strategy also creates an opportunity to rebalance a portfolio back to your target allocation while still minimizing taxes.

Asset location is all about making investment portfolios tax-efficient. It’s the process of determining the tax-efficiency of each security (stocks, bonds, ETFs, etc.) and which account (brokerage account, Roth IRA, Traditional IRA, 401(k)) would be best to hold each investment. Certain investments work better in a tax-advantaged retirement account, whereas others function better in a brokerage account. This strategy is about minimizing potential taxable income generated by the investments in a given year.

Retirement income planning is a crucial component of your overall strategy, and determining the right withdrawal strategy for you is a significant part of that conversation. In the accumulation phase, our team works to balance your investments in different tax buckets, such as tax-free Roth IRA, tax-deferred Traditional IRA or 401(k), and taxable brokerage accounts to enhance diversification in retirement.

Once you hit the distribution phase in retirement, we strategically manage your taxable income so as not to push you into a higher tax bracket while still maintaining flexibility for the future.

Say, for example, you have a sizable amount in your traditional IRA. You might not want to delay your distributions until 72 because it would result in annual required minimum distributions (RMDs) that significantly outweigh your income need and force excess taxable income. This strategy is all about tax maintenance and ensuring your money works as efficiently as possible in your golden years.

#3: Proactive tax planning saves you money

There are several ways that tax planning can save you money. By taking advantage of available opportunities, you won’t be surprised by your tax return each April. Here are a few ways that we implement tax planning into our client’s financial plans:

  • Invest in low-cost and tax-efficient index funds that garner minimal capital gains and promote a long-term holding strategy. Also, monitor capital gains recognized throughout the year and take advantage of tax-loss harvesting.

  • Maintain appropriate tax credits like the Affordable Care Act, health insurance premiums, and ensure that a client’s modified adjusted gross income remains below the required thresholds for these.

  • Blend charitable giving goals and tax-efficient donation strategies. This could be with a donor-advised fund (DAF), which enables you to remove highly appreciated assets from your portfolio without paying capital gains and potentially deducting the contribution. Another strategy is a qualified charitable distribution (QCD), which allows donations directly from a Traditional IRA to a qualified charity. Many people use QCDs as a way to lower their taxable income by donating all or a portion of their RMD. There are several considerations with QCDs like you must be 70 ½ and you can only do this transaction from a Traditional IRA (including SEP & SIMPLE IRAs), not a 401(k) or 403(b). It is also best suited for taxpayers who are no longer itemizing to gain the biggest tax benefit.

  • Run projections to ensure sufficient tax withholdings and estimated payments to avoid being caught off guard with an extra tax bill in April.

  • Take advantage of years with low taxable income to initiate Roth conversions. This increases the bounty of the tax-free bucket, which is incredibly helpful in retirement. For example, the CARES Act suspended RMDs for 2020, which presented an opportunity for those who didn’t need the income from their Traditional IRA to instead convert to a Roth IRA.

  • Maximize after-tax funding strategies like backdoor Roth IRA and even after-tax contributions to 401(k) should your plan permit. This again helps to build up the tax-free bucket, especially if your income is over the threshold to contribute directly to a Roth IRA.

#4: Tax planning boosts wealth accumulation

The more money you save in taxes, the more you can reinvest in yourself and your future goals. How can you do this? Here are a few suggestions.

  • Prioritize funding Roth accounts early in your career when your taxable income is lower.

  • Convert Traditional IRA dollars to Roth dollars in low taxable income years. You will need to pay taxes on the conversion, but it will likely be at a lower rate.

  • Avoid unnecessary capital gains. An example in your investment plan would be to steer clear of actively managed mutual funds in a taxable brokerage account. Why? The high turnover causes undue capital gain distributions, therefore increasing your tax liability.

  • Make the most of QCDs for charitable giving purposes.

As you can see, tax planning is a complex and comprehensive process. Your specific strategy should be unique to you and your plan. Everyone has different financial needs and visions for the future, and we seek to help you maximize your financial plan to set yourself up for success both now and in the future.

You haven’t created an IRS Online Account yet?! Why every taxpayer should

Taxpayers can securely access and view their IRS tax information anytime through their individual online account. They can see important information when preparing to file their tax return or following up on balances or notices. This includes:

  • Adjusted gross income. This can be useful if the taxpayer is using different tax software or a different tax preparer this year. They may need their AGI so they or their preparer can validate their identity.
  • Advanced Child Tax Credit Payments and Economic Impact Payments. People can check the amounts of their Advanced Child Tax Credit Payments and their Economic Impact Payments to help them accurately report this information on their 2021 return.
  • Estimated tax payments. The total of any estimated tax payments made during the year or refunds applied as a credit can be found on the account balance tab. A record of each payment appears under payment activity.

Additionally, taxpayers can view:

  • The amount owed for any past years, updated for the current calendar day
  • Payment history and any scheduled or pending payments
  • Payment plan details
  • Digital copies of select notices from the IRS
  • Tax records using Get Transcript

Here’s how new users get started:

  1. Select View Your Account on IRS.gov homepage.
  2. Select the Create or View Your Account button.
  3. Click Create Account.
  4. Pass Secure Access authentication. This is a rigorous process to verify your identity. The IRS must be able to authenticate your identity to continue.
  5. Create a profile.

Once the initial authentication process is complete, returning users can use the same username and password to access other IRS online services such as Get Transcript and Get An Identity Protection PIN, if applicable.

All password-protected online IRS tools for taxpayers are protected by multi-factor authentication.

2022 Tax Calendar

Self-Employed Individuals Pay Half of Deferred 2020 Social Security Taxes

January 18
Estimated Tax Payment for 4th Quarter of 2021 (Form 1040-ES)

Farmers and Fishermen Pay Estimated Tax for 2021 (Form 1040-ES)

January 31

File 2021 Tax Return (Form 1040) to Avoid Penalty if Last Installment of Estimated Tax Not Paid by January 18

January 31

File 1099-NEC to report nonemployee compensation

February 2022

February 15

File Form W-4 to Reclaim Exemption from Withholding for 2022

March 2022

March 1

Farmers and Fishermen File 2021 Tax Return (Form 1040) to Avoid Penalty if Estimated Tax Not Paid by January 18

March 15, 2022

If a calendar-year multi-person partnership or S corporation, file or extend your 2021 tax return. If the return isn’t extended, this is also the last day to make 2021 contributions to pension and profit-sharing plans.

April 2022

April 1

First Required Minimum Distribution (RMD) by Individuals Who Turned 72 in 2021

April 18

File 2021 Tax Return (Form 1040) and Pay Tax Due (except for residents of Maine and Massachusetts)

April 18

File Form 4868 to Request 6-Month Income Tax Return Filing Extension (payment of tax not extended)

April 18

File Schedule H (1040) and Pay Employment Taxes for Household Employees (file separately if Form 1040 is not filed)

April 18

Estimated Tax Payment for 1st Quarter of 2022 (Form 1040-ES)

April 18

Contribute to Individual Retirement Account (IRA) for 2021

April 18

Withdraw Excess IRA Contributions in 2021 to Avoid Penalty if Filing of Form 1040 Was Not Extended

April 18

Contribute to Health Savings Account (HSA) for 2021

April 18

Contribute to Solo 401(k) Plan or Simplified Employee Pension (SEP) Plan for 2021 by Self-Employed if Filing of Form 1040 Was Not Extended

April 19

File 2021 Tax Return (Form 1040) and Pay Tax Due for residents of Maine and Massachusetts

June 2022

June 15

Estimated Tax Payment for 2nd Quarter of 2022 (Form 1040-ES)

June 15

U.S. Taxpayers Living and Working Abroad File 2021 Tax Return (Form 1040)

June 15

U.S. Taxpayers Living and Working Abroad File Form 4868 to Request 4-Month Income Tax Return Filing Extension (payment of tax not extended)

June 15

Military Personnel on Duty Outside the U.S. File 2021 Tax Return (Form 1040)

June 15

Military Personnel on Duty Outside the U.S. File Form 4868 to Request 4-Month Income Tax Return Filing Extension (payment of tax not extended)

September 2022

September 15

Estimated Tax Payment for 3rd Quarter of 2022 (Form 1040-ES)

File Extended 2021 Tax Return (S-Corp and multi-person LLC’s)

October 2022

October 17

File Extended 2021 Tax Return (Form 1040) and Pay Tax Due

October 17

Withdraw Excess IRA Contributions in 2021 to Avoid Penalty if Filing of Form 1040 Was Extended

October 17

Contribute to Solo 401(k) Plan or Simplified Employee Pension (SEP) Plan for 2021 by Self-Employed if Filing of Form 1040 Was Extended

December 2022

December 31

Contribution to Employer-Sponsored Retirement Plan for 2022 (401(k), 403(b), 457 or federal thrift savings plans)