Strategies For The Current Market Environment
September 2022
As expected, the Federal Open Market Committee (FOMC) hiked rates by 75 basis points last week. This is the fifth rate hike this year, and the third consecutive 75 basis point (.0075) increase this year. In an environment where global ripple effects of the pandemic continue, supply chain issues remain, and a brutal war continues in Europe, it is perhaps understandable that higher-than-expected inflation has caused the Federal Reserve to shift from avowed patience to more hawkish tightening in less than a year. Although what we are witnessing is the normalization of monetary policy and the markets (which should be positive) it is the speed and size of the rate hikes that is creating disruption for financial markets and major asset classes. Inflation at these levels is not good if left alone for longer periods of time. Therefore, it makes sense to do the hard work now, raising rates to slow the economy by making it more costly to borrow funds – for both individuals and companies. Barring any new surprises, we expect more rate increases and inflation to moderate this year.
Unfortunately, these kinds of disruptions are unsettling for global financial markets. That said, this is certainly not the time to panic or make emotional investment decisions. Opportunities and strategies present themselves in all market environments. This is true in down markets as well. Here are several ways to think about the markets and your portfolio as the stock market is lower and economic uncertainty lingers.
Portfolio: For individuals with fixed income holdings, understand the rising rate environment does provide a long-awaited opportunity. Bond investors will now be reinvesting maturing bonds at higher yields. The same is true for investor in bond funds. Over time, maturing bonds will be replaced by higher yielding bonds. Although this can take time to work itself through a portfolio, holding bonds through maturity and reinvesting the proceeds at today’s rates will improve the portfolio’s yield in the long run. Most equities have dropped in value this year, including real estate. Understanding we all have differing cost basis, goals, and investment time horizons, now is a good time to talk to your team of trusted advisors (wealth manager, accountant, and estate planner) about gifting strategies, tax loss harvesting in taxable accounts and rebalancing for tax deferred accounts.
Gifting: Consider making estate gifts now. When market values are lower, it can be more advantageous to give assets to others. Consider gifting some of those assets to your non-charitable heirs now. You will use less of your estate tax exemption than if you gifted them after the assets recovered and your heirs are the ones that may benefit from the future appreciation in the assets.
To Roth or Not to Roth. If your traditional IRA has gone down in value recently, now may be a good time to convert some funds to a Roth IRA, potentially saving you money in taxes owed (the assets you convert are taxed now, but then grow tax free). Traditional IRAs are usually funded with pre-tax dollars. Roth IRAs are funded with post-tax dollars. Money in Roth IRAs grows tax free and is withdrawn tax free if you are over age 59-½ and your Roth IRA has been open for at least five years. It can be very useful to have tax-free money available in retirement, especially if you also have taxable income from Social Security and/or other retirement accounts. Roth IRAs also pass free of income taxes to heirs.
Roth IRAs for your children. Roth IRAs are also an ideal asset for children since they have such a long-time horizon for those funds to grow. Keep in mind your child must have earned income to be able to contribute to a Roth IRA, and they can only contribute up to the lesser of $6,000 (in 2022) or the amount they earn. As a parent, you can open a custodial Roth IRA for your underage children. You can even contribute to the Roth IRA on their behalf, as long as their earned income at least equals what you contribute.
Contribute to a 529 Plan. A 529 plan is a college savings plan. Funds grow tax deferred, and, if used to pay for qualified educational expenses, can be withdrawn tax free. Because the funds inside a 529 are invested in the markets, making your 529 contribution now can take advantage of potentially lower prices and higher expected future growth.
Fund Your 401(k) and other retirement accounts. For our younger clients, consider accelerating your retirement contributions to take advantage of “buying low.” While no one can predict what will happen in the short term, over the long term, markets have historically rebounded and moved higher after drops of 20% or more.
Cash: For those that have been out of the markets or have recently had a liquidity or wealth event, now is a wonderful time to become both a saver and long-term investor. Interest paid on cash and cash equivalents is higher than it’s been in years. But not all institutions are the same when it comes to interest rates paid on cash holdings. It pays to shop around for both rates and liquidity. Current conditions also suggest starting up a methodical entry into both the equity and fixed income markets. This will allow you to take advantage of the lower multiples on stocks and higher yields on fixed income.
The recent market volatility can feel unsettling and uncertain to everyone young and old. As we mentioned before, “inflation goes up like a rocket and down like a feather”. It will therefore take time for markets to recalibrate to the new conditions. Although the media tends to focus on headline drama and financial channels fixate on day-trading strategies, we believe in keeping a sound long term view. Keep your eyes on the horizon, not the volatile sea of economic data. Whether boating or investing, this will provide a better experience. We encourage you to call or e-mail anytime to discuss your portfolio or other financial matters.
Past performance is not a guarantee of future results. Filigree Wealth Advisors LLC is an investment advisor registered with the Securities and Exchange Commission. Filigree Wealth Advisors LLC is not a Certified Public Accountant (CPA) and we recommend all tax strategies be discussed with your CPA prior to implementation. Tax tables and policies are subject to change at any time by appropriate governmental agencies.