It is never easy to see the market, and your portfolio, decline. We don’t want to sell and lock-in losses. Are there any ways that you can get some benefit to offset some of the decline in value? Here are a few ideas you can use.
Specific client examples may not be representative of any other person's experience and is no guarantee of future performance or success.
See below for a full transcript of this video:
Welcome back to 30 Minute Money, the podcast that delivers action oriented smart money ideas and little bite size pieces. And, uh, I'm sort of setting the table for you. My name is Scott Fitzgerald. I own Rock v Recording and Production, which is a podcast and production studio here in lovely Rochester, New York. And the man actually feeding you those bite sized pieces is another, other than Steve worshiping from Focused Wealth Advisors. Thank you so much for, uh, well doing this. Really.
Yeah. Thanks for doing this with me, Scott. Nice to see
You. Nice to see you. I'm excited because I traditionally know zero about money and you are the person to ask.
Well, everybody's gonna get to listen to your tutoring .
Well, that's gonna be interesting because I have, I need a lot of tutoring. Okay. Definitely need a lot of tutoring.
Well, let's get into
It. Yes. So, so today you wanted to talk about, Well, the market, the market's been crazy. Yeah. It's been, it's
Awful. Pretty awful. Yeah. And you're gonna tell people like how to make it less awful or how to take advantage of that awfulness.
I'm I work, We're gonna call today the silver lining. Okay,
Um, yeah, the, the market's been pretty awful this year. It, it started out right from the beginning as, as a slide, and it slid all the way through June. And we had an honest to goodness bear market, and then it began to recover and it turned back up again, and it went up for a while and now it's headed back down again. It has been pretty crazy in the last week or so. But generally, you know, when people get their third quarter statements, it's, they're not gonna be terribly happy. It's not, it's not been a good time in the market. So
Market 1 0 1, Bull market. Bear market.
Yeah. So, so what is that? Yeah, So bull markets are up markets, bear markets are down markets. And where that comes from is, you know, there is a lot of testosterone in Wall Street. And so these have to do with how animals attack. So bulls attack up, so they put their head down and then they gore you with their horns as they, as they charge up. And so a a, a bull market is an up market when bears attack, you know, they stand up and they hold their clothes out and they come down on you. And so bear markets are down markets. That's where that comes
From. I can't believe I've never heard that explanation in my entire life. See, I've already, That's it. Well, there it is. We're we're, we're a minute and a half in. And everybody, thanks for joining us,
, join us next time for more,
For more animal husbandry. Um,
So, so what, why exactly do we have this, this market? What, I mean, I Sure there's a lot of factors, but
Yeah, there's, there's a ton of factors. Yeah. And, and, and I mean, part of it is that, that, you know, the market is cyclic. It, it goes up and it goes down mm-hmm. . And one of the challenges, frankly, that we've had is that it has been going up for so long without a real meaningful break that, you know, there, there's tension that gets built up in that, you know, so there, there's, there's too many reasons about why it's going down now. I mean, a lot of it has to do with, you know, we, there was too much money flowing around in, in the system. We've been, you know, the government's been pouring money like crazy into the economy. We'll, we'll come back to that theme a bunch of times on this podcast because you know that that's going, that's, that's one of the big reasons why our taxes are gonna be going up in the future, is just how much money's been dump being, being dumped into the economy.
Mm. But, um, one of the, one of the byproducts of that lately is that although the Fed has been trying to hold down inflation with easy money policies, you know, you get to a point where you know that that doesn't work anymore. And there's been so much money dumped into the system, and when too much money chases the same or too few goods, that's where inflation comes from. And they're trying to battle inflation. And so they're trying to raise interest rates and to slow things down. But when, you know, when, when, when you, when you look out into the future and you see slowing a slowing economy, that's, that, that tells investors it's not, it's not good news. And so there are lots of different reasons for it, but a lot of it has to do with inflation, the expectation of recession, a lot of those kinds of things coming. And that's, that's where a lot, that's, that's a lot of the pressure that's causing some of this bear market. And
You're here to tell us that there's ways to take advantage of all of
This. There are, there, there, there are silver linings to this. So, you know, it, I mean, there's nothing that we can do about the market. You know, it, it, you, things are gonna go down. However, there are ways of taking advantage of the situation where things go down. And so that's what I wanted to share today is, yeah, you're gonna get your statements, you're not gonna be happy with what they say, but there are things that you can do to at least take advantage of it to make the proverbial lemonade out of the lemons that are being given to us. And, you know, one of the things that I would, I would wanna start out by saying is, you know, one way that that would not be productive to respond to this is to see how far it's gone down. Panic and cash outta stuff, and just sit in cash.
That's, you do not wanna do that because, you know, the markets go up and markets go down, and I don't know when it's gonna turn. I mean, I have no idea. But if you back out and just sell a, sell a bunch of things and just sit on the sidelines and cash waiting for things to get better, unless you have a discipline system where you're following something specifically and have done that for a long time and know it works, you're probably gonna miss it. And it's just gonna go recover without you. So you will have locked in a law. So we're gonna talk about the silver lining, but, but we wanna start with don't just respond by cashing out and sitting on the sidelines. So let's just get that out of the
Way. Don't, I don't want to get you off on a tangent, but most of the people that you're talking about now, do they, are they people that, um, that are long-term investors? Because I know there's some people get in and get out and they're like day traders and all different kinds of things, and other people, they're looking for the long term. And so obviously panicking would be against that.
Exactly. And so are, are most of the people that you deal with kind of like the long term investors and Yeah.
The, the, the, the people that we want to communicate to are the people who have a long term perspective. If you're a day trader, if you have a lot of activity, Yeah. You know, you're, listen, you're watching c nbc, you're, you're, you're not listening to this podcast, you're looking at other things, right? So the people that we want to talk to are the people who systematically wanna build the skills to make good financial decisions and get themselves to the goals that they have, and ultimately a happy retirement. So, you know that those are the people that we're looking for. So those are the people, you know, that, that's not to say that you wouldn't adjust portfolios. You might rebalance at this point. You might take advantage of the fact that the markets have changed a bunch. And you might rebalance, uh, you know, in our portfolios, we have backed off into cash a little bit, but we have a discipline system and we have a huge research database that's been tracking all this stuff since the 1970s.
So we've got a discipline around it. So we have lightened up on stocks recently because we can see that the trend is down, but we look at it every day. And when specific technical things turn the other way, we're gonna move back in. But for most people who do not have this big, expensive research database, you do not wanna just cash out and sit on the sidelines. That's a great way to miss the, miss the upturn. So let's just, let's just take care of that. But let's talk about a few ways that you can, Okay. Take advantage of this. So the first is, just because things are down doesn't mean that you can't make use of it. And a lot of what we do revolves around taxes. And so one thing that you can do is if you have positions that you were thinking about that are not working for your portfolio or that you have too much of, you can sell some of those and, and lock in a loss, which will help because you can use it to offset any gains that you make in other things, ideally in the same year. But if you, if you have more than you can use in one year, you can carry 'em forward. And so if you can, so that, and that's called tax loss harvesting. So you can harvest some of those losses and use them to your advantage. When things go up and you want, and you need to sell something at a profit, you can use some of those losses to offset some of those profits.
, you see me? Do you see my eyes glaze over
A little bit? Are you still awake there? I
I, I'm, Oh, I'm awake. Okay, good. I'm awake. I'm just trying to follow. So what would be a real world scenario that you're talking about?
Well, so let's say that, um, um, you know, let's say that you, um, you bought a stock a long time ago, or you inherited a stock and, and, and you're not sure if you really want to hang onto it. Um, you know, but you're, you know, you, but you weren't that motivated to sell it. Well, if it's down a bunch, you know, you might wanna sell it. Now if just, if you're gonna get out of it, let's get out of it. Now, let's put it into something that when the market turns is more like, you know, is is is gonna be a better thing for you to capture the upside. And we can, we can, we can take advantage of, of, you know, if of of that loss that you've experienced. Um, you know, so you have to pay taxes on that loss. No. Is that what you're talking about?
You don't pay tax on loss. You pay taxes on gains. On gains, Okay. But you can offset those gains with losses. Okay. So if you sold something earlier in the year, for example, let's say earlier in the year, you had a different investment and you sold, and you, and you, you made a big capital gain on it. You made a bunch of money on it. Well, you can take advantage of what the, the fact that the market's gone down to sell something at a loss. And those losses can offset those gains, so you don't have to pay Gotcha. Tax on it. One of the other clever things that you can do is you can actually just switch things back and forth. So if you needed, if you need some losses to offset gains, um, you can sell out of something and buy something else that's similar.
So for example, um, you know, let's say that you have a, an s and p 500 index mutual fund, and it's down. And, and let's say that you bought some of it last year or early in the year. So, you know, you show a net loss on that position. Now, you don't necessarily want to get out of a, a broad based stock index fund, but what you can do, if you want to, if you wanna capture some losses that you can use elsewhere, you can sell that particular fund that you have, and you can buy a similar fund that way. You lock in the loss on the, on the fund that you sold, but you're not necessarily changing your allocation because you're replacing it with, you know, something that, that behaves similarly to that fund when the market goes up. Now you can't just sell out of something and buy it back, um, because you have to stay out of it for at least 30 days.
Or else if you, if you buy, if you sell it for a loss and you buy back in within 30 days, the IRS calls that a wash sale and they just, they just disregard that loss. You can't claim it, but you can buy something similar. And we don't, we don't invest in individual stocks, but a lot of times it's easier to communicate this with stocks. So let's say that you have, you have a certain amount of your portfolio that's invested in sort of home improvement type things, and you've got Home Depot mm-hmm. and Home Depot is way down. Well, you can sell some of that, or you can sell all of that. Home Depot realize the loss and buy lows. Oh, okay. Cause it's the same kind of thing. So you can keep it, you can keep it in the same kind of thing. Now, I'm not saying that Home Depot is bad and lows is good, right? I'm just using it as an example. Yep. But you know, the idea is that you can sell something for a loss and then move into something that's similar. So you've got that loss now that you can use to offset any gains and not necessarily change your portfolio overall. So if you can, it, nobody wants to see their portfolio down, but if you can use it to save money on taxes so much, the better. That's kind of the silver lining behind it.
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All right, so that's, that's one idea that you have. Yep. And I'm sure that you just have a whole bag of tricks that you can unload for us today, or at least
We've got a few. Yeah, we've got a few, a few. So that, that's, that's one sort of high level. You'll see, uh, a way to take advantage of a down market, but another way to take advantage of a down market that may not necessarily be so obvious is that now could be a really good time to contribute to, um, to some retirement plans. You could make an IRA deposit, you could make a Roth IRA deposit. Many people don't think about that until they're ready to file their taxes. Well, you and I are talking here in October. Um, you can put money into your IRA as late as April of next year for this year. But with the market down so much, maybe you wanna put that money in now because if the market, and again, I don't know when the market is gonna bounce back, but if the market turns later in the year and it starts coming up in the early part of next year, well then you'll already have some gains when it comes time that you would normally have put money in there.
So making those contributions to an ira, a Roth ira, even a a 5 29 college savings plan, if you do that now while the market is low, then you get a little extra kicker because again, long term the market has an upward bias. So things go down and things go up, but the average continues to go up. So if you can buy when things are relatively low, it's, it's, you know, it's, it's a li it's like going to the store when there's a sale. You know, you can, you can potentially get a little bit more than you otherwise would have. And when you, when you can do that inside of a retirement plan, then you know, you can ha you can end up having more in the end because you took advantage not only of putting the money in there, but you took advantage of the ups and downs of the market while you were trying to figure out when to do that.
Now I was talking to a buddy of mine the other day and he, and I was just as lost with him when I am with you, but he said, uh, he was talking about converting, he was gonna Yeah. Convert his, his IRA to a Roth ira. Yep. And so is that something that,
That's another great opportunity because, um, you know, when, when you do the conversion, when you convert, So I'm a big fan of Roth conversions. Well, the biggest problem, and we'll talk about this from time to time, the biggest problem that I see when people come into my office close to retirement is that they don't have the right balance in their portfolio of the different kinds of accounts. The taxable account, the tax deferred account, which would be like IRAs and 401ks and those kinds of things. Mm-hmm. and the tax free accounts like Roth IRAs and a couple other kinds. And so most people come in and they've got a ton of money in their tax deferred accounts because people like me have been telling 'em all along, defer deferred, deferred deferred, defer, put more money in there, put as much money as you possibly can, and then they get to retirement, everything's in deferred.
Well, that's a problem and that's a problem that we'll go into in other episodes. But part of what we try to do is to try to, over the course of time, gradually move money from the tax deferred bucket to the tax free bucket. And one of the, one great way to do that is to do a Roth IRA conversion. Now you don't wanna do a massive conversion all at once because when you do a conversion, it's taxable. So you want to be sensitive to that. You wanna only do it in an amount that makes sense in a year. But if you can do that during a year, do the, do the right amount during a year, but do it when the market is low, it's, it's a little bit like you get to convert an extra amount. So if the market's down 20% and you convert this, the, you know, let's, let's say that you, you were gonna convert $10,000 and now that 10,000 is $8,000 mm-hmm.
because the market has fallen. Well, if you convert that $8,000, you get taxed on $8,000. But when the market gets back to where it was, it's kind of like you converted $10,000, but you only had to pay for eight. Ah. And so this is a great time to be thinking about Roth conversions because again, they're kind of on sale. You know, you can, you, you can, you can convert $10,000 and it would've been like converting 12, or you can convert what was 10 and is now eight. But, uh, you know, so you get to convert what was 10, but you only have to pay for eight of it. So it's, it can, you know, that's one great way of taking advantage of the market being down.
And you said people come to you when they're close to retirement. What exactly is close to retirement? Like what, how many years more do they have do you think? When they're close to retirement?
Yeah, between five and 10. Five and 10 years. Like part of it depends on what else is going on in your life. So typically, you know, the, the time between when your youngest leaves college and you retire, that's kind of like the golden zone. That's, that's the, the, the, that's when people start really getting serious cuz like, okay, they're outta the house. I've paid my, I've done my time, right? I've, I've fulfilled my obligations, now I can really up on time. Exactly. So that's, that's typically five or 10 years, you know, before retirement. So that, that's, that's the, that's when, when I see a lot of people who are really, you know, then, then we sit down and say, Let's talk about that long term income plan. Let's talk about that long term tax plan. Um, but when they come in, in that zone, when they come in within that five or 10 years, we really have to hustle because there's not a lot of time, You can only do a little bit of this per year really typically, unless, you know, otherwise it stops making tax sense. And so anytime you have an opportunity like this, you know, it's, it's a great way to accelerate that transition.
Now you mentioned, uh, 5 29 plans, which I wasn't, uh, wise enough to do back in the day, but what exactly is a 5 29? I know it's a college. Yep. It's a college plan, right?
Yep. 5 29 plan is a tax advantaged account that you can use to save for higher education. And it's not specifically college. Okay. You can use it for secondary education, you can use it for other educational kinds of things, but it's most often thought of as a college account. And so you get to put, put money away into it. It might be, it might be tax deductible on a state basis depending on the circumstances. Um, and it continue and it grows tax deferred. And as long as you pull it out for a qualifying educational expense, then you don't have to pay tax on the game. So that's what a 5 29 plan is. And just like anything else that you're saving for the long term, if you can deposit money when things are low, it's kind of like you got to put in a little bit more than you otherwise would've been able to.
What other, what other uh, cool tricks do you have up your sleeve today?
Well, so those are the, those are the big, those are the big, the ones. Now, the other, the other thing that I can say is if you have been sitting on cash and you're, you know, because you're gradually getting into it or you're waiting for a good time, now is a good time to commit some of that cash because it's better to buy things when they're down. Now that doesn't mean that they're not gonna continue to go down. They may very well, you know, when we look at that research database, the trend is still down. Even though we have some pretty powerful up dayss recently, the trend is still down. But you know, you, you can start committing some of that cash while things are down. And, and if you do it, if you cost average that put a little bit now, a little bit in a month, little bit a month after that, you can take advantage of the fact that it's down. And if it goes down lower, it's a way of taking advantage of the, uh, market being even lower to, um, to buy things when they're on sale. So when the market gets back into an up trend and catches up to itself, when it goes back up to the average, you will have taken advantage of some of that and gotten a little bit of extra growth outta the portfolio.
So you're saying if I have $10,000 in a, in a savings account mm-hmm. , for example, I would take that and put it in the Roth IRA or something like that, or,
Yeah, so you might, so let, let's say that you have a bunch of money in the bank that you've been building up and you were intending to put money in an IRA for this year anyway. Mm-hmm. do it now while the market is down. Um, if you were, if you had some money that, that you were going to invest, start thinking about starting that re starting that now. Right? Start now when it's, when it's least attractive. When things are on sale, everybody gets scared of it. Commit some of that money. Now, if you were thinking about doing a Roth conversion, you know, this is a good, again, where you and I are talking here in October. We've got two months left in the year. Take a look at, you know, what your tax return is likely to look like by the end of the year. And if there's some room in a low tax bracket, if you're in the 12% bracket or the 22% bracket, and there's some space between where you are in the top of that bracket and you were thinking about, maybe I'll convert some of my IRA to a Roth to take advantage of that low bracket. Well do it now while the market's down. Because when the market gets back up again, it's kind of like you converted more.
How consistent is the, are there other like general trends that you see like in, in phases? Like, oh, this happens before it, usually when it's down it kind of comes back this way? Or is it just like a free for all?
Well, it's not a free for all, but it doesn't look at patterns. It just look as looks at trends. Okay. And so, you know, we don't, we don't predict the market. We don't believe that anybody can do that consistently, but you can see trends. Okay. And that's, that's long established. It's, you know, it's been known for a very long time. It's not that sexy because you're always reacting after the fact. So everybody wants to know what's the market gonna do next month or next year. I have no idea. What I can tell you is we're in a down trend, and what that means is we've backed away from some things a little bit. And when we see the market, when we see the trend turn back up again, we're not gonna catch it right at the bottom because that's not a trend yet. But when we, when the trend is established, and you can see that right in the numbers, then we'll go back to long term allocations.
And one thing that is sexy, I believe is, uh, 30 minute action items, which I think you have some for us today.
Well, that's sexy to you. I'm I'm glad it does it for you. Yeah. So we have, so on your 30 minute action list this time, um, take a look at your unrealized gains and losses. Take a look at your portfolio and see which things, if you sold them today, would, would, would, would give you a gain or give you a loss. And think about the possibility of maybe selling some of those things that are in a loss position and replacing them with other similar things. So we don't want you to go to cash, we just want you to harvest some of those losses. So take a look at your unrealized gains and losses, and then take a look at last year's tax return and get an idea of where you're likely to end up this year, v um, at the end of the year so that we can see where you are versus the top of your bracket. If there is a space there, if there's some low bracket that you can take advantage of. Think a little bit about converting some of those tax deferred accounts into a Roth ira and, um, and start filling up that tax free bucket. So 30 minute action item, look at your unrealized gains and losses, look at last year's tax return and get an idea of where you're gonna be in your bracket this year.
So it looks like we're coming up on time a little bit, but I wanted to make sure that everybody knew what you have coming up. I know that there's some, uh, webinars or something that you have on a weekly basis that you want, let, let people know about.
There are, we have a, uh, taxes in retirement webinar every week. Uh, it is free. It gives you some of the big concepts on how to make, how to set yourself up for a low tax or even a tax free retirement. Just go to the website focused wealth advisors.com/webinars and you can have, there's a button right there where you can sign up and, um, and participate in that. So that's what I would encourage people to do and
People can get ahold of you through that, uh, URL Anyway,
You're Yep. And all our contact information is there if you wanna get ahold of us focused wealth advisors.com, all kinds of ways to get ahold of us. Awesome.
And if you want to get ahold of firstname.lastname@example.org, there you go. We're a podcast and production company. We've teamed up with Steven here with, uh, Focused Wealth Advisors to bring you the 30 Minute Money podcast. And, uh, we're available for all your podcast needs. Thank you so much, uh, for joining us this time, and we'll be back next time with some more nuggets on the 30 Minute Money podcast. Thanks.
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