The new year can’t seem to come soon enough for most investors, and yet we still have almost three months before we belt out Auld Lang Syne. A global pandemic to start the year led to economic shutdowns and depression-like conditions across the world. As populations grappled with how best to battle Covid-19, the United States was simultaneously facing political unrest in its major cities. Federal and state governments, along with the Treasury and Federal Reserve, enacted extraordinary measures to help everyday American citizens and small business during such unstable times. And amidst all of this, the stock market continued to climb back toward and through its pre-Covid levels.
As we move into the fourth quarter and approach what was originally thought to be the only hurdle of the year, the U.S. Presidential Election, there are several items investors should consider for the final three months in what has been a very interesting 2020.
Rebalance, Rebalance, Rebalance
The broader market index may not be far off from where it was at the start of the year but a peek beneath the hood tells a much different story. While the mega cap tech stocks have lifted the market to new highs, much of the market remains well below pre-Covid levels. As we head into the fourth quarter, it is important to take a temperature check of your portfolio’s allocation and make any changes as necessary to ensure the portfolio aligns with your risk objectives.
While rebalancing should be part of an investor’s normal operating procedure, it is even more important this year considering not just the market fluctuations we’ve experienced but the anticipated volatility ahead of and after the election. Overexposure to any one stock, industry or sector could have negative consequences depending on how the market views that stock/industry/sector once the election results are known. Likewise, being under-allocated to a particular investment could mean missing out on positive price action in the days following the election. No one has a crystal ball that can tell us exactly what the world will look like on Wednesday, November 4th – the 2016 election showed us how wrong some pollsters and investors can be. There are no certainties when it comes to investing, so rebalancing is most often the best course of action.
Tax Loss (or Gain) Harvesting
Many are familiar with the process of tax loss harvesting around year end. Through tax loss harvesting, investors seek to sell positions trading below their cost basis to realize a capital loss on the investment. Typically, the investor then immediately invests the proceeds into a similar security (e.g. selling Coca-Cola, buying Pepsi) to keep exposure consistent and aim to hold that new position for at least thirty days before rotating back to the original investment. By doing this, the investor can now use that loss to offset taxable capital gains elsewhere in his or her portfolio, or, if there are no capital gains to be offset, to reduce ordinary incomes by the maximum $3,000 per year. Anything beyond the $3,000 can then be rolled into future years’ gains as a Loss Carryforward. This is one way taxable investors can increase their after-tax portfolio return.
There is also “tax gain harvesting,” which may sound counterintuitive but could make sense to some investors this year. With the economy essentially shutdown for several months, many business owners and employees will see reduced income on their 2020 tax returns. Additionally, retirement account owners were not required to receive their Required Minimum Distributions in 2020, which also reduced taxable income for many. If any reduction in taxable income places you in a lower tax bracket, it is worthwhile to confirm with your financial planner or accountant if that new tax bracket also comes with a lower capital gains tax (which currently ranges from 0-20%). If so, it may be worth further considering if taking advantage of this year of reduced income to realize gains on outsize positions in the portfolio if it means you are reducing risk in your portfolio and doing so in a tax-efficient manner. We would not recommend letting the tax tail wag the dog, but if this happens to be a low tax year for various reasons, it may be wise to consider taking advantage of lower rates you may not see otherwise.
Additionally, if this is indeed a lower tax year, it may be worthwhile to explore a “Roth Conversion” for those investors with Traditional IRAs. In a Roth Conversion, the investor converts an amount from the IRA to a Roth IRA in a taxable transaction. If reduced income in 2020 has dropped an investor into a lower tax bracket, there may be some benefit to paying a reduced tax today to receive tax-free growth and withdrawals in the future.
Continue To Save and Invest
If 2020 has showed us anything, it has been the importance of thinking long term. It’s what leads to creating an appropriate asset allocation, sticking with that allocation during volatile times, and rebalancing to the allocation when the portfolio is askew. As we enter the fourth quarter after such a strong rebound from the March lows, many are concerned with the market’s valuation and fear a hiccup in the search for a vaccine or the potential for a major pullback should the election lead to chaos. A natural response to this fear is to move to the sidelines or reduce the amount you are saving and investing.
While the 2016 election may be the poster child for why predicting election outcomes and their impact on the market is so difficult, it’s important to take a step back and see the bigger picture. The market has gone up and down under every president, and still it has an average annual return of 10%. Deciding now is the time to cease investing would be taking a guess as to how the market will perform over the short run. Rather than guessing what another election will mean for your portfolio, it’s wisest to focus on your allocation targets and continue to save and invest for your long-term goals.
As we head into a potentially volatile fourth quarter, it is important to focus on what you can control. Take the time to assess your portfolio and consider potential tax-saving techniques discussed here. With so many questions on the minds of investors it is always a good time to reach out to your financial advisor to discuss your investments and what moves, if any, should be made before year-end.
Note: Fritz Schoenhut, MST, CFA, is Managing Director and Portfolio Manager at Point View Wealth Management, Inc., a registered investment advisor at 382 Springfield Ave., Summit.
Point View Wealth Management is an SEC-registered investment adviser and part of Peapack Private Wealth Management. For over 25 years, Point View Wealth Management has been providing customized portfolio management services and comprehensive financial planning solutions for individuals and their families to develop and achieve their financial goals.
Contact us at 908-598-1717 or email@example.com for more information and or to arrange a complimentary consultation.
Point View Wealth Management is located at 382 Springfield Avenue, Suite 208, in Summit.
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