Luke Delorme: Opportunities for worried investors

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Amid wild stock market gyrations, health concerns, and a world suddenly turned upside down by the new coronavirus pandemic and related disruptions, your financial picture might feel a like a house of mirrors. One way to assert control is to capitalize on financial planning opportunities during the crisis. There are a number of financial strategies that might be more attractive than ever in the current environment, depending on your circumstances.

Portfolio rebalancing

If you own a diversified investment portfolio, you probably own bonds and maybe gold, depending on your risk tolerance and financial circumstances. The good news is, bond funds and gold have held up relatively well during the current crisis, which is their purpose.

The relative stability of bonds and gold mean that they have become a larger share of your portfolio. For example, if you have targeted a 40 percent allocation to bonds, they might now represent more than 45 percent of your portfolio, depending on when you last rebalanced.

These present an opportunity to sell bond funds and buy stock funds that are below your intended target. This can improve your future long-term risk-adjusted returns. A note of caution: It can be difficult to rebalance to precise targets when market are volatile.

Tax-loss harvesting

Tax-loss harvesting is the process of selling a position with a loss and immediately buying a similar, but not identical, position.

Capturing losses can allow you to offset current or future capital gains, or to offset income up to $3,000 per year. Losses in excess of gains can be carried forward to future tax years.

Investors with larger taxable accounts might be able to create losses that can offset $3,000 of income for many years to come. A $3,000 offset in taxable income would result in a tax bill that is $660 less for someone in the 22 percent tax bracket ($3,000 x 22 percent).

Capturing tax losses should be done carefully, keeping in mind the opportunity for rebalancing a portfolio. Also, make sure to avoid wash-sale rules, which disallow tax losses if the same position is bought or sold within 30 days before or after your trade. As with rebalancing, be careful of day-to-day volatility when trading for tax losses.

Roth conversions

Roth conversions should be a top priority for many people in their later 50s and early 60s, especially those who have retired early and are facing a period of reduced income. They can be especially useful if you defer collection of Social Security.

In a nutshell, Roth conversions allow traditional IRA owners to convert to the tax-free Roth vehicle.

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Roth conversions require you to pay taxes on any amount converted. Evaluating this trade-off is complicated and requires numerous assumptions regarding future taxes.

The current market decline might warrant a fresh look for many IRA owners. Specifically, an investor with an IRA balance that has fallen sharply might now be able to convert a larger portion of it to a Roth than previously planned. In addition, investors whose wages have been reduced or who have been laid off might find themselves in a lower tax bracket this year.

As a reminder, current income tax rates are historically low and scheduled to revert to pre-2017 levels in 2026. While Congress might change rates again, this provides a six-year window to convert before rates revert.

Invest excess cash

Financial planners often recommend holding three to 12 months worth of expenses in cash or equivalents, although this is largely dependent on personal circumstances and preferences.

Nonetheless, many investors have been sitting on excess cash as markets were soaring. Although it might not feel like it, the recent market decline might represent that opportunity. When we look back at past market events, we see that returns have been historically strong in the three- and five-year periods after severe downturns.

Given the uncertainty of the current environment, you want to make sure you continue to hold a comfortable cash cushion, but this might represent an opportunity for courageous investors to finally invest extra cash.

Refinancing debt

As a rule of thumb, financial planners generally advise people to consider refinancing a mortgage when your interest rate can be lowered by at least 0.5 percent. At a 0.75 percent reduction, it is strongly encouraged.

Given the collapse in bond yields around the world, refinancing is more attractive than ever for investors who hold a mortgage or other debt. However, it is no secret that mortgage rates have fallen, so, expect the process to take some time, since lenders are backed up with requests.

Control what you can

In perilous times, it can feel like we've lost control, both financially and in our personal lives. There is no doubt that everyone feels uneasy right now. By seizing financial planning opportunities, you can take back a good measure of control.

Luke Delorme is director of financial planning at American Investment Services in Great Barrington. He can be reached at


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