This year’s market slide may present tactical opportunities to rejigger portfolios, as well. Investors with concentrated positions—for example, shares of their employer’s stock— could sell some of those assets in order to better diversify their portfolio and avoid a bigger tax hit than they would have before markets tumbled, says Colin Overweg, a financial planner and founder of Advize Wealth. “When the market is down, it can be a good time to sell concentrated positions with lower capital gains and then diversify,” he says.
Investors can also use this moment to convert a traditional IRA to a Roth IRA. Roths allow you to contribute after-tax dollars, but you don’t pay taxes on withdrawals during retirement. That’s the opposite of a traditional IRA, which allows you to make pretax contributions and then pay taxes on withdrawals. A conversion triggers a tax hit, but given market declines, the consequences may be less severe, says Overweg, who is based in Los Angeles.
“This is not timing the market, but it is an opportunity for tax savings,” Overweg says.
For clients looking to earn more from the fixed-income part of their portfolio or from emergency funds, I bonds are an option and can be bought directly from the federal government via the TreasuryDirect.gov website. They earn interest based on combining a fixed rate and an inflation rate, but investors need to hold I bonds for a year and are limited to purchasing $10,000 worth of them each year. As of May 11, their rate is 9.62%.
“In December, when inflation started increasing, I had clients buy $10,000 worth and then another $10,000 in January,” Overweg says. “I don’t know where else you can find an emergency fund yielding 8%.”