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Controlling the Controllables

Categories: Insights |
Estimated Reading Time:
8 minutes

“The interest is up and the stock market’s down,” say the lyrics of Hank Williams Jr.’s 1981 country hit A Country Boy Can Survive. Sounds like a familiar tune!

It sort of feels like we are reliving a replay of the early eighties. So many parallels. Rising rates, high inflation, declining stock market, recession… While the trends are similar, fortunately, we haven’t reached the levels of interest rates and inflation as we did in 1981 and 1982. The markets peaked on November 28 of 1980 shortly after the 1980 presidential election and then subsequently declined about 20.5 percent to 111 on the S&P 500 by February ’82. It subsequently declined to 102 in the summer of ‘82, that’s right 102 (currently the S&P 500 is about 3,647 and that is after being off nearly 22 percent year-to-date as of this writing). Inflation in 1980 was 13.58 percent and in the summer of 1981, the Federal Reserve had raised the overnight lending rates by nearly 9 percent to 20 percent. So, while things are feeling not great these days, we aren’t quite at the level of the 80s.

What can we do amid such dismal economic circumstances? Control the controllables! We have to maintain our focus on our long-term strategy, be patient, and go forth calmly focusing on the things that we can influence.

Controllable 1: Stay The Course

With market turbulence, rising interest rates, high inflation, global turmoil, energy limitations, droughts, and climate disasters bringing trouble to our doorstep, it is hard to stay focused on the light at the end of a seemingly dark tunnel. And yet: This too shall pass.

It is critically important to have a strategic plan and execute it well, which will also help you feel in control. A misstep in the execution of a well-developed plan can be costly. One such misstep would be withdrawing from the markets during a downturn. While this might feel like the smart (or safe!) thing to do, being out of the market during the early stages of recovery could cost a few percentage points of annualized return over the longer-term future of your portfolio.

See the chart below, which illustrates the costly impact of missing the recovery. You will notice that missing just the 25 best days from 12/31/87 to 12/31/21 (total of 12,053 days) will have cost an investor over $260,000 on an investment of just $10,000.

control growth of 10K

The markets have generally been resilient and have increased despite significant declines. According to the chart below, 96 percent of the time the market was higher five years after a significant quarterly decline. The chart stacks up the worst quarterly declines ranked worst to best (of worst) since April 1936.

control returns after 25 worst quarters

Investors who have maintained discipline and not reacted with unwise steps have generally been rewarded.

If it feels like you don’t have the time to await recovery, understand that the length of recovery has historically been dependent on the depth of the decline. Most declines since 1945 have been modest (less than 20 percent) and the recovery times have averaged 1.5 to 4 months. The deepest declines since 1945, 40+ percent, have averaged about 5 years to recover. The 20 – 40 percent declines have averaged a little over one year to recover. While history is not a guarantee of the future, it provides some insight to help stay the course.

Staying committed to a long-term plan created for you with the help of CERTIFIED FINANCIAL PLANNER™ professionals can help benefit you now and in the future.

control percentage declines and average time decline lasts

Controllable 2: Reduce or Eliminate Debt

Work diligently to reduce and eventually eliminate your debt. The benefits of debt elimination are enormous and go well beyond your financial well-being: Feeling less stress, experiencing better mental health, viewing yourself with more self-esteem, and having better cognitive function are all benefits of being debt-free. It also results in a better quality of life for you and your family.

There are also physical benefits of being debt free, such as experiencing fewer illnesses, having lower blood pressure, and experiencing less pain. Read more about the benefits of debt reduction in this MoneyCrashers article: https://www.moneycrashers.com/reasons-get-out-debt/ .

Financially speaking, debt elimination increases your available cash flow, which in this period of higher inflation can help keep you on track for your goals and give you more control. Working toward this step can help stabilize your financial situation and bring other physical and mental benefits as well.

Controllable 3: Maintain Discipline – Re-evaluate Your Budget

Many families find themselves reexamining their spending to help control costs. As food and energy prices have escalated, it has forced families to make difficult choices and cut back on purchases that they may have previously made.

Look first at discretionary spending for areas to eliminate. This might mean cutting out or reducing vacations and travel, or it could mean putting off the upgrade of a vehicle or home improvement. Budgeting is often viewed as limiting when in fact, if done faithfully and deliberately, it will lead to greater freedom and choice for your family. It is critical to control your money instead of allowing your money to control you!

Controllable 4: Save, Save, Save

Be deliberate about directing your money. Pay yourself first before other bills and make sure that the funds you save are being directed to the most effective account types for your situation.

It all starts with an emergency fund. Make sure that you have an emergency fund that can sustain you through three to six months’ worth of expenses. For some, in certain circumstances or specialized professions, it may take longer to replace your income if you were to unexpectedly lose it, so you may have to prepare for a longer period without income. Making steps toward building an emergency fund will help keep you from having to borrow in the face of a crisis and be more in control of your finances.

Once you have your emergency fund built, savings dollars should be directed toward your short- and intermediate-term goals. Of course, these goals can’t overshadow the fact that you need to save for retirement or a period in your life where you may be incapable of physically or mentally producing income.

Saving tax efficiently is important – determining if you should be saving into your company’s retirement plan, an IRA, or a Roth are all decisions a competent advisor who knows your situation will be able to help with. Generally speaking, you want to make sure you capture your company’s retirement plan match. If your company matches dollar-for-dollar up to 3 percent then you should at the very least put away 3 percent to capture the free money. The 2022 limit for 401(k) and 403(b) retirement plan deferrals is $20,500 with a $6,500 catch-up provision for those over age 50. Many experts suggest that individuals should contribute upwards of 15 percent of their income toward retirement; this will vary depending on circumstances.

Controllable 5: Maximize Tax Opportunities

Health Savings Accounts

For those currently employed or self-employed, a Health Savings Account (HSA) can be a fabulous way to put away money on a pre-tax and possibly tax-free basis if used properly. Individuals with high deductible health insurance plans qualify to save up to $3,650 and those with family coverage with deductibles greater than $2,800 can contribute up to $7,300. Don’t forget about the often-overlooked HSA catch-up for individuals over age 55. They can contribute an extra $1,000 annually. Allow your contributions to accumulate and invest the proceeds wisely so you have an additional pot of assets post-retirement to help pay for medical costs. In the meantime, accumulate your medical receipts for items you have paid out of pocket for so that you might eventually withdraw funds from your HSA after age 65 on a tax-free basis.

Roth Conversions and IRA Withdrawals

If you are retired and have very little reportable income, you might be in a position to convert to a Roth or withdraw funds from your IRA or qualified plan accounts without paying taxes (or a very low rate of tax). Some taxpayers find themselves in a position where, because of low reportable income and the benefit of a higher standard deduction or other deductions, they may have negative taxable income for which they can either convert dollars from their IRA to a Roth for future use or withdraw funds for more immediate upcoming needs and not trigger much, if any, federal income tax. Domani’s professionals are well positioned to spot and plan for this opportunity.

Qualified Charitable Distributions

Another opportunity many of Domani’s clients have been taking advantage of since the passage of the higher standard deduction is using required minimum distributions from IRAs to directly make their charitable contributions. While these distributions are not eligible for a deduction, the income that would have otherwise been added to your tax return is eliminated by the qualified charitable distribution, allowing both the client and the charity to benefit!

Tax Loss Harvesting

Throughout turbulent years similar to 2022 Domani’s team of professionals look for opportunities to take capital losses on certain investments by selling the investment and immediately buying back a similar-type investment (to stay invested in the market). Generally, after 31 days the replacement investment will be sold and the original position will be bought back again. This may allow a client to accumulate some capital losses, while staying invested, to help offset other gains either in the current year or perhaps a future year.

Control the Controllables

Staying on course during challenging financial conditions requires thoughtful planning and clear unemotional execution. Studies have found clients who work with professional advisors tend to improve their probability of successful outcomes. Morningstar and Vanguard have both done research in the past and have concluded that investing in a quality wealth advisory relationship can meaningfully improve returns and help you feel more in control. These numbers are hard to quantify and vary wildly because they are situational, they also don’t take into account additional benefits such as thoughtful planning, decisive execution, and peace of mind.

Weathering this time of uncertainty can be easier on your mind and stress levels if you commit to your long-term plan, reduce debt, evaluate your spending habits, prioritize savings, and make sure you’re planning well for tax purposes. This can all help you feel more in control.

If you’d like to have a conversation with a financial planner at Domani exploring how you can take wise steps during the turbulent markets of 2022 or think through your financial future, please get in touch with us anytime at 855-855-5455 or by emailing info@domaniwealth.com. We’re always happy to start a conversation!

Sources: Voker’s Bear: The Bear Market of 1982 – Forbes. 17 Reasons Why You Should Get Out of Debt – Benefits of Being Debt-Free, Amy Livingston Money Crashers. Vanguard 2019 Whitepaper, Morningstar.

Important Disclosure

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from Domani. A copy of Domani’s current written disclosure brochure discussing our advisory services and fees continues to remain available upon request.

PLEASE SEE ADDITIONAL IMPORTANT DISCLOSURE INFORMATION

Important Disclosure

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from Domani. A copy of Domani’s current written disclosure brochure discussing our advisory services and fees continues to remain available upon request.

PLEASE SEE ADDITIONAL IMPORTANT DISCLOSURE INFORMATION

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