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8 Action Steps for Investors to Add Value in a Volatile Market

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Background

 

The third quarter delivered mixed results from capital markets. Broad domestic and international indices entered negative territory, while emerging market equities and commodities returned -10% or worse. While the volatility may have surprised some investors, drawdowns of this magnitude are well within the historical range of short-term outcomes in equity markets. Smart investors will take the market volatility as an opportunity to rebalance their portfolios, confirm cash needs, and implement other techniques, described below.

  1. Plan ahead for cash flow needs
    Don't invest cash reserves in long-term investment portfolios. Review your cash needs for the next 12 to 24 months. Develop a timeline that includes payments you need to fund that are not covered by your monthly income, and offset these by conservatively anticipated cash additions. Needs for cash can include capital calls, a new car, taxes, a down payment for a home or recreational vehicle, medical treatments, gifts to charities or family members, and 4-6 months of living expenses (your emergency fund) and more. Contributions might include annual bonuses, distributions from private investments, or the sale of real estate. Keep the present value of your net cash needs in a conservative and liquid portfolio strategy comprised primarily of cash and short-term fixed income investments. You may find you have extra cash on hand that can be deployed into longer term assets, taking advantage of market downturns.

  2. Confirm sources of liquidity
    Consider your sources of cash. In times of financial stress, lenders typically provide access to liquidity to the extent they do when financial conditions are strong. If you have equity in your home, consider getting a Home Equity Line of Credit (HELOC) in place to give you access to additional liquidity when it is needed. The costs of establishing a HELOC can be offset by the comfort of having additional sources of liquidity. Typically interest costs are paid only on outstanding balances. Plan ahead for options exercise or concentrated stock diversification to increase your liquidity, and to methodically reduce the risk of holding a concentrated position. This approach may also offer opportunities for tax planning. Sales programs based on dates rather than price, including 10b-5-1 plans, can provide more effective ways to systematically reduce concentrated positions. Waiting for an ideal price may mean never selling.

  3. Check portfolio anchors
    When equity markets go through a period of negative performance, take the opportunity to confirm whether or not your portfolio anchors are doing their job. High quality bonds and lower volatility liquid alternative hedge funds should add value (outperform) traditional equities when equities turn south. If your portfolio anchors are not moderating portfolio losses, then move into new strategies that better diversify and protect your portfolio against equity market downturns.

  4. Realize short-term losses
    Investors who introduced new equity investments into their taxable investment portfolios in the last year may have short-term investment losses to realize. The IRS allows investors to use $3,000 of realized losses as an offset to ordinary income each year. Additional realized losses can offset realized gains. Any unused realized losses can be carried forward indefinitely to use in future tax years when needed. When selling short-term losses, it is important to avoid violating the IRS wash sale rules; otherwise the realized loss deduction may be denied. Check http://www.sec.gov/answers/wash.htm. Talk with your advisor and/or tax advisor about your personal circumstances.

  5. Rebalance your portfolio
    Investors may postpone liquidating some of a concentrated equity position due to potentially high capital gains tax consequences. An equity market downturn can provide an opportunity to diversify concentrated positions at a lower price, thereby reducing the capital gains on the sale. Reinvesting the proceeds in a lower risk, more diversified and balanced portfolio can help the portfolio withstand market volatility.

  6. Watch expected dividend payouts
    Before redeploying the cash from sales (through rebalancing and/or diversifying concentrated positions), consider the year-end dividend payouts schedules of mutual funds. Most fund managers begin providing estimates as early as the end of October. Hold off on investing in funds that are anticipating large distributions in December. Target asset allocations can be achieved in the meantime with ETFs, which typically pay no or low distributions.

  7. Convert your IRA to a Roth IRA
    Investors with IRAs can consider using a market downturn to convert an IRA or part of an IRA to a Roth IRA. Pre-tax contributions and gains in the IRA will be considered as taxable income in the year the conversion is made. Check with your advisor or CPA to ensure that any tax consequences are considered in the context of the overall wealth plan.

  8. Consider gifting strategies
    The market downturn may have provided investors with an opportunity to transfer high beta stocks outside of their estates at reduced prices. This way the appreciation of the security can occur outside of the estate, not subject to estate or gift tax when the market recovers.

If you'd like to understand how these eight investment strategies can help your year-end planning, email us at wealth@svb.com.

We'd be happy to discuss.

 

(1015-026) P-15-14522 11/15

The Fine Print

 

This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice, nor is it to be relied on in making an investment or other decision. You should obtain relevant and specific professional advice, before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction. Past performance is not a guide to future performance. Opinions and estimates are as of a certain date and subject to change without notice.

All material presented, unless specifically indicated otherwise, is under copyright to SVB Wealth Advisory, Inc. and its affiliates and is for informational purposes only. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of SVB Wealth Advisory, Inc. All trademarks, service marks and logos used in this material are trademarks or service marks or registered trademarks of SVB Financial Group or one of its affiliates or other entities.

©2018 SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of FDIC and Federal Reserve System. SVB >, SVB Financial Group, Silicon Valley Bank, and Make Next Happen Now™, are registered trademarks. SVB Wealth Advisory, Inc. is a registered investment advisor and non-bank affiliate of Silicon Valley Bank and a member of SVB Financial Group. Products offered by SVB Wealth Advisory, Inc.:

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About the Author

Lorraine Monick is a Relationship Manager where she is responsible for advising clients in the innovation sector on tax efficient investment strategies, managing unique assets including private holdings, spending policies, and concentrated stock management. Her capacity for understanding both the big picture and the fine details allow her to embrace the broad range of investment challenges and opportunities her clients face in managing, preserving and growing their wealth. Lorraine works closely with third-party estate, tax and insurance and philanthropy specialists to provide clients with customized solutions designed to achieve their wealth management goals.

Lorraine has over 20 years of investment experience. She previously served as Managing Director of Harris myCFO overseeing investment advisory services for the firm’s Silicon Valley clients and serving on the national Investment Strategy Committee. Lorraine also spent nearly a decade as the Senior Director, Portfolio Management, with BNY Mellon in the Pacific Northwest managing affluent client relationships, overseeing the delivery of investment services and serving on national strategic asset allocation and policy committees.

Lorraine is a graduate of the University of Victoria where she earned a BA in Economics, and a Masters of Public Administration. She is a CFA® charterholder, a Certified Financial Planner® Certificant, and a member of the CFA Society of San Francisco and CAIA Association.


The individual named here is both a representative of Silicon Valley Bank as well as an investment advisory representative of SVB Wealth Advisory, a registered investment advisor and non-bank affiliate of Silicon Valley Bank, member FDIC . Bank products are offered by SVB Private Bank, a division of Silicon Valley Bank. Products offered by SVB Wealth Advisory, Inc. are not FDIC insured, are not deposits or other obligations of Silicon Valley Bank, and may lose value.

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