Midyear can be a good time to take a halftime break and evaluate your investments — especially this year, after nearly six straight months of stock market decline.
Perhaps stock and even bond losses have exposed flaws in your portfolio. Maybe they offer the potential to adjust holdings to take advantage of new opportunities. Now also might be the time to pursue a potentially important tax strategy.
Take a hard look at your portfolio
The first half of 2022 could rank as one of the worst ever. It might even go down as the weakest start in a half-century. Large growth stocks, especially technology giants, and the funds that hold them were battered. Other assets, including bonds, were similarly affected.
Financial adviser Mark Matson of Matson Money in Scottsdale suggests kicking the tires to understand what you really own and whether you can accept the risks. If you have mutual funds or exchange traded funds, check some of their top stock holdings and look for overlap among funds. This is something investors should have done a year ago, but it's not too late.
You can't control inflation, the economy or many other things, but you can control the composition of your portfolio. “Look at the different assets and the mix of assets you own,” Matson said. He recommends broad diversification while avoiding heavy concentrations in large technology stocks or other areas.
While you’re at it, make sure you’re paying reasonable investment costs. The typical stock mutual fund charges 0.47% a year, or $4.70 annually, on each $1,000 invested, reports the Investment Company Institute. Bond funds charge 0.39% on average, or $3.90 per $1,000. There's usually no reason to pay more, and you often can find good choices for much less. Fund expenses have dropped sharply in recent years.
While broad declines or bear markets aren’t enjoyable, they eventually subside, setting the stage for stronger investment returns.
Nobody knows when the current slump will end (if it hasn't already). The market, as represented by the Standard & Poor’s 500 index, was already down 24% from its peak in early January to the recent low point in mid-June. Since World War II, the median bear decline is 25%, according to LPL Financial. That suggests the current downdraft might nearly have run its course.
Make changes if needed
If you don’t need to pull money from your investment portfolio within the next couple of years, you likely have the luxury of ignoring all of the recent volatility, especially if your portfolio is reasonably well diversified. If not, midyear can be a good time to rebalance.
Rebalancing provides an investment discipline that’s easy to follow. It also forces you to buy low and sell high, as you’re redeploying money from investments that have fared relatively well and putting the cash into laggards. Just beware of any fees or taxes that might arise with each transaction. Rebalancing is more efficiently done in a tax-sheltered account such as an Individual Retirement Account or a workplace 401(k) plan.
Matson suggests rebalancing if any of your broad investment categories deviate more than 5% from your target. To cite a simple example, suppose you want to hold 60% of your assets in stocks or stock funds and 40% in bonds/bond funds, but the mix is now at 55%/45%. In that case, you could pull some money from the bond side and reinvest it in stocks.
Speaking of that 60/40 portfolio, some have wondered whether the concept is dead, considering that portfolios with a typical 60%/40% stock/bond mix were down a steep 15% so far in 2022 through early June.
However, Barry Gilbert, asset allocation strategist at LPL Financial, contends that the strategy isn't dead but rather "wounded." This year is unusual in that both stocks and bonds have fallen, he said. That rarely happens.
Since 1976, the S&P 500 has finished lower in eight calendar years, yet bonds, including their interest returns, advanced in each of those years. At any rate, the recent price declines make both stocks and bonds more attractive going forward, Gilbert said.
Consider a Roth conversion
Roth IRAs are popular, and now might be a good time to take advantage of them by converting or transferring money from a traditional IRA. Following stock or bond market declines, when account balances fall, converting becomes more affordable.
First, though, some background on the two types of IRAs. While you can't deduct your contributions to a Roth, the money you invest grows tax-sheltered, and your withdrawals usually are tax free (if taken after age 59½ and kept in the account at least five years).
With traditional IRAs, by contrast, you do get a front-end deduction along with tax-deferred growth, but your withdrawals are taxed. They're also subject to required minimum distributions after age 72, which, among other consequences, can push some of your Social Security benefits into the taxable category. Hence the rationale to convert.
But converting comes at a cost, as you must pay current-year taxes on the amount you switch over. If you moved $50,000, you would owe $12,000 in taxes if in the 24% federal bracket (assuming the added income doesn't push you into a higher bracket). State taxes also could apply.
Financial expert Ed Slott of IRAhelp.com recommends converting if you have money outside of the account to pay the tax bill. While the recent stock market slide makes this strategy more appealing (by reducing IRA balances and thus the tax bite), future tax rates might be a bigger factor. Slott predicts tax rates will rise in coming years, reflecting massive federal debts and nonstop spending.
Converting thus lets you pay the tax at what could be today's relatively low rates. "Everyone with an IRA should consider converting to diversify the tax risk," he said.
Conversions offer some flexibility. Traditional IRA owners can do them, regardless of income and with no age restrictions. Also, investors can transfer parts of an account, rather than the entire balance, and may pursue multiple transactions over the years.
"My best advice is to get into a pattern of doing conversions in smaller amounts over time, so that you're dollar-cost averaging your tax rates," Slott said.
But you can't cancel a conversion, as was allowed years ago.
"This is a permanent decision," he said. "Once you convert, you will owe the tax."
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This article originally appeared on Arizona Republic: Tips for reviewing, altering your investments after rough 6 months