Stay Invested and Control What You Can

We’ve been getting some questions on potential headwinds for the economy like inflation and Fed tapering and tax increases.  Some are questioning whether to keep their equity exposure as-is in this environment while others are questioning whether to continue to keep existing cash on the sidelines to deploy during the imminent crash in the market.

It’s difficult to determine the short-term impact of the prevailing headwinds.  As they make the headlines every day, the market so far doesn’t seem to care, which in part reflects the tailwinds of a recovering economy and strong corporate earnings, an accommodative Federal Reserve and the potential for additional fiscal spending.  This is reassuring as the market tends to look forward out six months or more.  Paul Broughton provided some context for the month of September in last week’s commentary.

Headlines create short-term volatility in the stock market, but once the news is digested in an initial reaction, it’s the economy that matters.  The consensus is for continued economic growth and corporate profits and you need to keep this in mind as you consider what the short-term or headline reaction may be to any or all of these notable headwinds.

A recent example is the fourth quarter of 2018, when the S&P 500 dropped -20% by Christmas Eve, only to recover all of that loss by early January 2019 and then proceed to increase by 30% for the rest of the year.  The Federal Reserve had started to increase interest rates at the time, but the economy was also in really good shape and this was ultimately reflected in the stock markets.  In hindsight, it was “normal volatility” and the best thing to have done was nothing.

If/when the Federal Reserve starts to reduce the bond purchases (tapering) it started when COVID initially hit, there is likely to be a reaction in the market to this news.  But the Federal Reserve is not looking to shut off economic growth and even the potential tax increases in play still leave overall individual and corporate income tax rates below where they were during the majority of the current bull market.  Once the market has digested either of both of these, then the focus will return to the economy and projected corporate earnings to determine the valuation and trajectory of the market.

The point of all of this is to reinforce that most market volatility comes and goes and is not something that we can control or try to “time”.  If you need your assets in the market to grow over time or to generate income, then you need to stay invested through the ups and downs.  Volatility is normal and “time in the market” is what matters.

As we’ve written before, if you have a plan in place and your investments are serving a purpose in your plan, then what makes more sense is to focus on what you can control and there is plenty to think about as summer passes and we head toward the end of 2021, such as:

Are you on track to fully fund your retirement accounts for 2021?

Have you funded your Health Savings Account for 2021 if you are eligible?

Have you taken your 2021 required minimum distributions from your retirement accounts and any inherited IRAs? 

Are there any qualified charitable distributions you’d like to make from your IRAs during 2021 to potentially lower your required minimum distributions?

Are there any unrealized capital losses that can be harvested before year end?  Or do you want to wait this year and save them to use in 2022 in the event the tax rates are higher then? 

What should I do about my concentrated stock position given the potential for higher tax rates in future years?

What is my projected taxable income for 2021?   You should have an idea of what your earnings will be at this point and you can look at the account statement for any taxable investment account to determine the year-to-date amount of interest, dividends and realized capital gains.

Will my 2021 income impact future Medicare monthly premiums?  Do I need to make any changes to my Medicare coverage for 2022?

Should I consider a Roth IRA conversion?  If your income is low, then 2021 may be a good year before tax rates increase or future sources of taxable income (social security or required minimum distributions) begin.

Is the allocation of my portfolio between stocks and bonds still in line with my long term plan?

Are the beneficiary designations for my retirement and any annuity or insurance contracts up to date?

Are my estate planning documents up to date?

Your ACM Wealth Advisor can assist with all of these issues and many more.

Longer term, both your wealth and your health will improve when you focus on those things that you can control or that you have a passion for.  Don’t ignore what’s going on (you should stay curious, at least), but worrying about market volatility (or anything, generally) is unlikely to lengthen your life expectancy.  We’ve also noticed over time that folks who do pay attention, but who don’t fret or make decisions under duress, tend to achieve better long-term investment performance.  They realize that the market will eventually come back.

Your ACM Wealth Advisor is here to listen and talk you through and to help redirect your attention back to the big picture of your financial plan and/or something else on your financial “to-do list” that remains unchecked.  In the meantime, enjoy the final days of summer and email or call your ACM Wealth Advisor if you have any questions or concerns.

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