During a market correction, many investors become sufficiently unsettled and feel compelled to do something about it. They have a strong temptation to take action on their portfolio, which, unfortunately, can often yield negative, unintended consequences.
This impulse should not be ignored. But if adjustments are going to be made, productive actions can be taken to mitigate the effects of a market correction or recession. These proactive financial-planning considerations include the following:
1. Leverage losses for taxes
- Review tax loss harvesting: Examine the positions being held at a loss and initiate a strategy that allows you to write these off against capital gains. Be advised that this requires careful action, however, as you want to book the loss but not miss out on any potential recovery. Work with your Mercer Advisors advisor to utilize our technology in creating potential tax advantages for yourself.
- Consider a Roth conversion: Converting to a Roth IRA when market valuations are low allows for more conversion from a taxable bucket to a tax-free bucket. Depending on your circumstances, this can be enormously beneficial.
2. Continue to invest
- Make contributions and invest now: Market corrections might feel terrible, but they do generate buying opportunities at considerable savings. For example, if an individual started investing in the market after the tech bubble burst in the early 2000’s, the S&P 500 index is, as of this writing, up 236% from December 31, 2001, so continue to make your regular retirement plan contributions. And for those who’ve been sitting on the sidelines waiting for an opportunity to invest, the time is now.
- Consider portfolio withdrawals: Market downturns can have a significant impact on portfolio withdrawals, especially for investors who are already making them. Evaluate your portfolio by matching assets to future cash flow needs. At Mercer Advisors, we create cash flow–based financial plans to prepare for downturns in the market. If we know you have future liabilities, we can help immunize the portfolio from downturns by ensuring there are sufficient assets to meet those expenses.
3. Reassess cash flow
- Evaluate your cash flow right now: Review your budget to identify how much is being spent on discretionary items. This exercise will dictate how much cushion is necessary for emergencies, and it’ll help ensure that future obligations are funded with the best asset source.
- Plan around large expenses: For those who are retiring within the next five years, it’s important to get as much clarity as possible regarding future expenditures. Negative returns in the early retirement years can have a more substantial impact on financial planning outcomes than those that occur later in retirement.
- Strategize distributions: If you’re thinking about distributions from an investment or retirement account, consider waiting. If possible, time the distributions for when the market recovers, or consider spreading out the distributions.
4 Explore tax-advantaged estate planning options
- Explore gifting options: Many opportunities for estate planning are available when valuations are lower. For those who are gifting assets to an heir, lower assets means more wealth can be transferred in tax-free or tax-advantaged ways. Consider making a gift of up to $16,000 in appreciable securities rather than cash.
- Extend the life of your wealth: In advance of the 2026 sunset of current exemptions, consult with your attorney about the various trusts available for wealth transfer. Locking in an advance of the future inheritance and having those assets recovered outside of the estate can be extremely advantageous.
Financial planning during a market correction or recession can offer meaningful ways of improving your financial position, if they’re executed properly. Make an appointment with your advisor to discuss the strategies above. Most important, channel the eagerness to act in a direction where it can have the greatest impact.
Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.
All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. Content, research, tools and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors.
Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy or product made reference to directly or indirectly, will be profitable or equal to past performance levels. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance and results of your portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. Indexes are not available for direct investment.