As geopolitical events, inflation concerns, possible interest rate hikes, and other factors are impacting financial markets, it is essential to understand what to do – and what not to do – to help stay focused on long-term investment objectives.
During a recession (an entire economy contracts for several months) or a correction (a market decline of more than 10% but less than 20%), investment strategies depend on risk tolerance, timelines, and overall financial goals.
But in the short term while valuations are low, there are several options to consider for dealing with issues like cash flow, assets and debt, tax planning, and long-term planning. For example:
- If cash flow will be tight:
- Strategically fund any shortfalls by using the most advantageous source of money
- If planning to retire soon, review your budget to see if you prefer to work a little longer or reduce spending in non-essential categories for the first few years
- For debts and assets:
- Consider refinancing your mortgage or debts now while interest rates are low
- Identify holdings you’ve retained only because of their low basis and consider reducing your position while valuations are low, minimizing realized gains
- For tax planning:
- If you have a traditional 401(k) or IRA, converting some of the assets into a Roth IRA could be beneficial
- For assets with a tax loss, consider harvesting the lost, which could reduce your tax liability
- For long-term planning:
- If you’re in a position to help family members in need of financial assistance, consider making intrafamilial loans when the rate the IRS allows for private loans is low. This avoids gift tax, locks in a favorable interest rate for the borrower, and can act as an advance on an inheritance
- Consider implementing wealth transfer techniques that take advantage of low valuations and rates (such as GRATs, CLATs, IDGTs, and private annuities)
See more suggestions to help prepare for possible issues now. And to discuss how we can help guide you through your personal and professional life transitions during up markets and down, please contact BakerAvenue.
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