October… Too Late to Make a 2022 Financial Impact?

October is traditionally associated with falling leaves and pumpkin spice. But it is also financial planning month. Why? Because fall is an ideal time to review the current year (with roughly three-quarters of it done) and plan for the new one three months ahead.  Despite the fact that it starts the last quarter of the year, smart affluent investors use it as a time to make important check-ups.

The Market and the Economy Are Linked


Affluent investors, perhaps, have more reason than usual to use October to soberly review and reflect on the past year and the upcoming one: The market and the economy are linked, and both have been choppy this year.

Interest rates, a key part of the economic picture, have been rising throughout 2022. They may climb further as the U.S. Federal Reserve attempts to rein in inflation—the primary reason it has chosen to hike rates.

The recent increase in interest rates may also precipitate the beginning of an economic slowdown. Historically, businesses and consumers pull in spending in the face of rising rates, which often causes a contraction in growth. If business profits take a hit, the stock market is also likely to contract. Even if profits do not decline, higher rates themselves may affect how investors value future earnings, putting pressure on stock prices.

That said, in a down market caused by rising interest rates, there are ways to reduce the impact on your portfolio. Here are some tips from investment managers in Houston on how investors should reassess their financial portfolios in the midst of market declines.


Keep Your Portfolio Diversified


The best recipe for maximum performance in your investment portfolios is to keep them diversified. The old adage “don’t keep all your eggs in one basket” is a  good rule to follow. Usually, investment portfolios are divided among at least three asset classes: stocks, bonds, and cash.

Stocks generally provide the most potential for appreciation. On average, U.S. stocks have historically advanced 10 percent per year, according to the Securities & Exchange Commission’s publication, “Saving and Investing”.  This is true, despite the impact of periodic down years. However, stocks are also one of the riskiest investment because they tend to have greater volatility than bonds or cash/. Stock market fluctuations are not an aberration; they’re to be expected.

Both bonds and cash provide ballast for investment portfolios, generating some opportunity for return (though it is more limited than that of stocks) with the potential to provide stability and down-side risk protection during market downturns. Bond prices can fluctuate, but the moves are generally smaller than the swings seen in the stock market.

Bond returns are, on average, lower than typical stock market returns (and, before the recent run-up in rates, they were at historically low levels). Meanwhile, the principal in cash investments only rarely has fluctuated in value, making them a very stable investment while providing some yield (though this, too, has been at historically low levels recently).

Diversification among these three basic categories is important; but diversification within each category is also critical.  In our 50+ years of working with successful families, we often encounter situations where a family’s wealth has been built up because of concentrated exposure to the stock of one company (generally where a family member was employed for many years).  That can result in a stock portfolio that is somewhat lopsided.  There may be reluctance to diversify because of the tax impact from selling shares of that concentrated position, to spread out stock exposure across other industries.  We believe a temporary downturn in the market offers a unique opportunity to accomplish needed diversification without taking the same tax “hit” that might occur at other times.  Alternatively, there may be the opportunity to sell more recently acquired shares of stock at a loss (“tax loss harvesting”) to offset gains in diversifying the concentrated position.  These are examples of how we aim to use a volatile market year to actually improve the long-run positioning of the portfolio.

Your financial advisor in Houston can advise on portfolio review strategies that make sense during times of market volatility. 


Make Sure You Have the Right Asset Allocation


Given the asset classes, what’s the right asset allocation? You need to discuss this variable as part of your retirement planning in Houston (because there’s no one-size-fits-all). Much of it depends on your goals and factors such as your age.

Suppose you are saving for a major purchase, such as a home or second home: In that case, your asset allocation may become more heavily weighted than usual toward cash. If you are saving for short-term goals, your progress can be eroded during a bear market, and you may not have time to regain the erosion in the short term.

Similarly, suppose you are nearing retirement. In that case, your asset allocation possibly should be shifted to some degree toward the preservation of capital rather than its appreciation. Don’t delay such an important shift.  Again, a significant stock market drop may affect you negatively. But for younger people, a potentially appropriate asset allocation may often be a heavy stock market weighting to take advantage of the higher appreciation potential over time.  Markets have always recovered, given time.

Your asset allocations should be reviewed at least once annually to ensure they are consistent with your goals and other factors.

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Consider Your Risk Tolerance


Another element affecting your investment portfolios is your risk tolerance. You need to weigh your readiness to accept losses against the likelihood of stock market performance; survey the pros and cons. A stock market correction (meaning a 10 percent drop) or a bear market (meaning a 20 percent or greater decline) can be profoundly upsetting to investors with a low-risk tolerance.  The most important factor is not to adopt a risk posture that you cannot stay with, even when the going gets a little bumpy.

However, familiarize yourself with the average performance history before deciding. The stock market, over time, is one of the few investments that can outpace the effects of inflation on a portfolio, which on average clocks in at 2 percent per year, and recently, has run much higher.

 

Review Your 401(k) Contributions


If you have access to a 401(k) at work, look over your contributions to it. These funds can have profound advantages for investors. For example, if your company provides matching funds to your input, you are leaving free money on the table if you don’t participate.

There’s more -- Because they can also save you money on taxes: Qualified payments into traditional 401(k)s don’t get taxed—at all—because they are taken out of your paycheck before the taxes are assessed. The amount you withdraw in retirement will be taxed, but that comes later. In the meantime, that money in your 401(k)s grows tax-free until your retirement.

Even late in the calendar year, if you determine you have not fully funded available 401(k) investments, you may still be able to make that up through increased payroll deductions before the end of the year.  This can restore missed matching employer contributions.  And, if you are contributing more heavily after a decline in the market, you may likely gain the investment leverage from what’s called “dollar cost averaging”.


Take Advantage of Every Tax Break Available to You


It’s also prudent to review your finances in October, taking every potential tax break before 2022 taxes are due (and for 2023). Possible tax-reducing opportunities may include:

  1. Maximizing your tax-advantaged retirement contributions, using both 401(k)s and Individual Retirement Accounts (IRAs).
  2. Considering contributions to Roth 401(k)s and IRAs. These accounts change your taxation picture because you don’t get an advantage in the year of contribution (since Roth contributions are made with money that has already been taxed). However, you benefit when you withdraw the money at retirement because distributions are tax-free by then, unlike with traditional accounts.
  3. Contributing to a 529 educational savings account for any children or grandchildren.  This generally does not make a difference on your federal tax return, but may well provide some benefit on your state income tax return, depending on your state of residence.
  4. Maximizing your tax-deductible charitable contributions to lower your taxable income.
  5. Utilizing any stock market losses to reduce taxes. For instance, capital losses can be used to offset your capital gains for the tax year.  This is what we referred to above as “tax loss harvesting”. 

Talk to a Financial Advisor in Houston TX



Talk to a Financial Advisor in Houston TX Remember that October is a great time to reassess your financial plans—and talking to a financial advisor in Houston, TX, may lead to their becoming much more tax-efficient. We can help you review your goals, strategize your asset allocation, and assess your risk tolerance. Contact us today. 




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Disclosure:
Investment Advisory Services are offered by Linscomb & Williams, an SEC registered investment adviser, and a subsidiary of Cadence Bank. Linscomb & Williams (L&W) provides financial planning, investment management, and retirement plan and investment consulting services. L&W is not an accounting firm, and does not provide tax, legal or accounting advice.
Information expressed herein is based upon opinions and views of L&W and information obtained from third-party sources that Linscomb & Williams believes to be reliable, but Linscomb & Williams makes no representation or warranty with respect to the accuracy or completeness of such information. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice. Past Performance is not indicative of future results. Realize that investment market Indices are not managed and cannot be invested in directly. 


 

 

Jessica Banitt, CPA, CFP®

Jessica Banitt, CPA, CFP®

Jessica Banitt is a Director and Wealth Advisor at Linscomb & Williams.

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Investment Advisory Services are offered by Linscomb & Williams, an SEC registered investment adviser, and a subsidiary of Cadence Bank. Linscomb & Williams (L&W) provides financial planning, investment management, and retirement plan and investment consulting services. L&W is not an accounting firm, and does not provide tax, legal or accounting advice.

Information expressed herein is based upon opinions and views of L&W and information obtained from third-party sources that Linscomb & Williams believes to be reliable, but Linscomb & Williams makes no representation or warranty with respect to the accuracy or completeness of such information. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.