Planning Strategies During Market Uncertainty & Volatility: Financial Planning and Portfolio Positioning

During these times of market and economic stress the Resonant Capital team is focused on evaluating a huge amount of information, stewarding our clients’ capital and being available to advise clients on recommended strategies and action.

We are launching several pieces in a “mini-series” designed to highlight ideas and opportunities during this period of volatility. This first piece focus on Financial Planning and Portfolio Strategies.

Future items will highlight strategies in Estate Planning, Use(s) of Debt, Social Security, and information on the CARES Act (the recently-pass economic stimulus package) as well as market commentary.

Below are several areas of focus we are working with clients on a daily basis. If you have questions or would like to know than what is included in this description, please reach out and we would be happy to talk through our process.

Financial Planning

The first rule of planning is…have a plan! Many of our clients have worked very hard to help us build their plan. Investors with well-built and -understood plans are better-prepared for market volatility. With that said, recent events have been historic and as such, challenge assumptions made in less-stressful times. Updating plans often reveals strategic or structural value for clients.

Portfolio Strategies

We are working independently or with clients to implement a number of strategies shown to improve probabilities of success over time.
These include:

1. Tax Loss-Harvesting – Selling assets in tax-loss positions and replacing them with like or different securities (taking care to avoid “wash sale” restrictions) can create meaningful future tax savings for taxable investors. Loss-harvesting has the benefit of taking current pain (losses) to lock in future gain (tax liability mitigation and/or net cash flow in the following year). We are actively seeking to loss-harvest in taxable accounts.
2. Rebalancing – Rebalancing from more- to less-expensive asset classes, within individual risk tolerance and asset allocation targets, generally smooths portfolio volatility over time and can contribute to excess return as a result. In addition, when used with loss-harvesting strategies in periods of market volatility, portfolio managers may be able to offset gains in appreciated securities that are otherwise difficult to reposition.
3. Alternative Investments – Owning assets that are not subject to the daily pricing mechanism of the public markets, and thus the whims of investors, reduces portfolio volatility and can create very real advantages. As an example, cash-flowing real estate or private equity investments have a few specific benefits:
   1. Stability - They are not marked-to-market on a daily basis;
   2. Tax Benefits - They can create passive activity tax losses;
   3. Rebalancing - They produce cash flow "off-cycle" for reinvestment and aid in overall rebalancing;
   4. Diversification - They provide additional diversification to marketable portfolios.
      1. As examples, we recently received an update on upcoming distributions from a private real estate sponsor and heard that two client-owned private companies were to be sold.
      2. Risk tolerance, qualification, suitability, allocation, discretion and project/portfolio liquidity need to be carefully considered before taking illiquid alternative investment exposure.

Roth IRA Conversions

Roth IRA "conversions", wherein owners change the status of their IRA assets to Roth and pay often-high and upfront marginal (income) tax, may be more attractive now. Why? Because Roth IRAs have a number of positive long-term features:

1. One-Time Taxation - Owners and beneficiaries pay income tax once, at contribution or conversion;
2. Tax-Free Growth - Appreciation and distribution occur tax-free to both owners & beneficiaries;
3. No RMDs - No distribution to owners is required in retirement, raising compounding potential;

As such, Roth IRAs are highly desirable but can be challenging to access for high rate taxpayers because they take a higher marginal tax hit from conversion. However, in years where taxable income and/or the value of assets converted into Roth IRAs is lower, the "hurdle" to overcome this burden effectively becomes lower.

It can be difficult for investors to think strategically during these times of uncertainty and a constant flood of information. Resonant’s focus is on helping our clients navigate these times with a focus on a strategic long-term plan. These are several of many strategies we work with clients to execute so that they can align their portfolio to their long-term financial goals.