Americans are feeling the effects of soaring inflation not seen in 40 years. Inflation, as measured by the consumer price index, has surged this year, hitting a high of 9.1% in June and posting an elevated reading of 8.2% in September. As a counteroffensive, the Federal Reserve has been aggressively raising rates to cool demand to fight inflation. Both stocks and bonds have seen tremendous declines this year, impacting the portfolios of millions of Americans.
Here is a backdrop of 2022 and how you can position your portfolio for success in the years ahead.
The S&P 500 has shed over $10.2 trillion, or roughly 25%, since the start of the year through Sept. 30. The aggregate bond index is down over 15% during the same time period. The Fed has raised rates five times this year, starting the year at a range of 0%-0.25% and ending at 3%-3.25% as of the September meeting. The Fed is set to meet two more times this year to determine interest rate policy.
Inflationary pressures aren’t unique to the United States. Many countries around the world are also seeing high single-digit, and in certain cases double-digit, inflation numbers. As a result, other leading central banks have been raising rates. The high global inflation coupled with the instability created by the Russian invasion of Ukraine, slowing Chinese economy and strong dollar have had negative effects on U.S. investors owning foreign securities.
Given this backdrop, consider these tips to find opportunities in these times of uncertainty:
- Don’t panic. If you have a well-structured portfolio that’s matched with your cash-flow needs, history shows that staying the course pays off. Rebalance where appropriate, but do not let fear drive your investment strategy. Additionally, with the impending midterm elections, do not let your political biases control your investment decisions.
- Buy more. The adage “buy low, sell high” is hard to do because the best time to buy has historically been when the news is at its worst. Consider these methods to put your money to work:
- Fund Roth individual retirement accounts. Roth IRAs will enjoy tax-free growth when the market recovers. Roths can be funded with direct contributions, traditional IRA conversions and back-door contributions, as well as through 401(k) contributions.
- Maintain or increase 401(k) contributions. It may be tempting to reduce your 401(k) contributions to boost current income; however, doing so could come at the expense of an employer match and potential future retirement income.
- Invest excess cash that’s earmarked for long-term growth systematically over time. This approach can help you acquire more shares at potentially discounted prices relative to future values.
- Pay off variable rate debt. With the upward trajectory of interest rates, paying off variable rate loans could save you money in the long run if rates continue to move up and inflation persists.
- Harvest losses. Intentionally sell investments at losses and shift the proceeds to alternative investments that are not substantially identical within the same asset class. This can help reduce tax liability and maintain your asset allocation. The IRS allows $3,000 in capital losses to offset any type of income in any given tax year. Losses above $3,000 can offset realized capital gains or be carried forward and available to claim in future tax years. Be mindful of the wash-sale rule, which disallows losses if certain conditions are not met.
- Give it away. Gifting appreciated stock to individuals can do a few things for you:
- Gifting securities can remove shares out of your taxable estate at these potentially lower levels, which would allow for growth to happen outside of your estate when the market recovers.
- Gifting shares to the next generation could allow them to sell the shares in their potentially lower tax bracket or find a place for it in their portfolio. For 2022, an individual can give $16,000 to another without filing a gift tax return.
- Gifting shares of concentrated positions could help reduce the overall risk of your portfolio while accomplishing estate planning or gifting goals.
Work with your credentialed financial planner or investment adviser to do a checkup on your portfolio and look for opportunities in challenging times.
Andy Drennen is a certified financial planner and senior portfolio manager at Simmons Private Wealth in Springfield. He can be reached at firstname.lastname@example.org.