Tips for reviewing, modifying your investments after about 6 months

The middle of the year can be a good time to take a halftime break and evaluate your investments, especially this year after nearly six straight months of stock market declines.

Perhaps losses in stocks and even bonds have exposed flaws in your portfolio. Perhaps they provide the ability to adjust holdings to take advantage of new opportunities. Now may also be the time to pursue a potentially significant tax strategy.

Take a close look at your portfolio

The first half of 2022 could be one of the worst ever. It might even become the weakest start in half a century. Big growth stocks, especially tech giants, and the funds that hold them have been beaten. Other assets, including bonds, were similarly affected.

Financial adviser Mark Matson of Matson Money in Scottsdale suggests kicking the tires to figure out what you really own and whether you can accept the risks. If you have mutual funds or exchange-traded funds, check out some of their top stock holdings and look for overlaps between funds. This is something investors should have done a year ago, but it’s not too late.

You can’t control inflation, the economy, or many other things, but you can control the composition of your portfolio. “Look at the different assets and the mix of assets that you own,” Matson said. He recommends broad diversification while avoiding heavy concentrations in big tech titles or other areas.

While you’re at it, be sure to pay reasonable investment costs. The typical stock mutual fund charges 0.47% per annum, or $4.70 per year, on every $1,000 invested, reports the Investment Company Institute. Bond funds charge 0.39% on average, or $3.90 per $1,000. There’s usually no reason to pay more, and you can often find good choices for a lot less. The fund’s expenses have fallen sharply in recent years.

Although broad declines or bear markets are not pleasant, they eventually subside, paving the way for stronger investment returns.

No one knows when the current crisis will end (if it hasn’t already). The market, represented by the Standard & Poor’s 500 index, was already down 24% from its peak in early January to its recent low in mid-June. Since World War II, the bear’s median decline has been 25%, according to LPL Financial. This suggests that the current downdraft may almost have run its course.

Make changes if needed

If you don’t need to take money out of your investment portfolio in the next two years, you probably have the luxury of ignoring all of the recent volatility, especially if your portfolio is reasonably well-diversified. Otherwise, the middle of the year can be a good time to rebalance.

Rebalancing provides easy-to-follow investment discipline. It also forces you to buy low and sell high as you redeploy money from investments that have done relatively well and invest money in laggards. Just beware of any fees or taxes that may arise with each transaction. Rebalancing is most effectively done in a tax-sheltered account such as an Individual Retirement Account or a workplace 401(k) plan.

Matson suggests rebalancing if any of your major investment categories deviate more than 5% from your target. To cite a simple example, suppose you want to hold 60% of your assets in stocks or stock funds and 40% in bonds/bond funds, but the allocation is now 55%/45%. In this case, you could withdraw money from the bond side and reinvest it in stocks.

Speaking of this 60/40 portfolio, some have wondered if the concept is dead, given that portfolios with a typical 60%/40% stock/bond mix have fallen 15% so far in 2022. until early June.

However, Barry Gilbert, asset allocation strategist at LPL Financial, argues that the strategy is not dead but rather “wounded”. This year is unusual in that stocks and bonds have fallen, he said. It rarely happens.

Since 1976, the S&P 500 has ended down in eight calendar years, but bonds, including their interest yields, have risen in each of those years. Either way, recent price declines make stocks and bonds more attractive going forward, Gilbert said.

Consider a Roth Conversion

Roth IRAs are popular, and now might be the time to take advantage of them by converting or transferring money from a traditional IRA. Following a decline in stock or bond markets, when account balances drop, conversion becomes more affordable.

First, though, some information on the two types of IRAs. Although you cannot deduct your contributions to a Roth, the money you invest grows tax-free and your withdrawals are generally tax-free (if made after age 59½ and kept in the account for at least five years).

With traditional IRAs, on the other hand, you get an initial deduction as well as tax-deferred growth, but your withdrawals are taxed. They are also subject to required minimum distributions after age 72, which, among other consequences, may push some of your Social Security benefits into the taxable category. Hence the reason to convert.

But the conversion comes at a cost, as you have to pay current year taxes on the amount you transfer. If you moved $50,000, you’d pay $12,000 in taxes if you’re in the 24% federal bracket (assuming the extra income doesn’t push you into a higher bracket). State taxes may also apply.

Financial expert Ed Slott of recommends converting if you have money outside the account to pay the tax bill. While the recent stock market crash makes this strategy more attractive (by reducing IRA balances and therefore the tax bite), future tax rates may be a bigger factor. Slott predicts tax rates will rise in coming years, reflecting massive federal debt and relentless spending.

The conversion therefore allows you to pay the tax at what might be today’s relatively low rates. “Everyone with an IRA should consider converting to diversify tax risk,” he said.

Conversions offer some flexibility. Traditional IRA owners can do this regardless of income and with no age restrictions. Additionally, investors can transfer portions of an account, rather than the entire balance, and can pursue multiple transactions over the years.

“My best advice is to adopt a pattern of converting in smaller amounts over time, so that you average your dollar tax rates,” Slott said.

But you can’t undo a conversion, as was allowed years ago.

“It’s a permanent decision,” he said. “Once converted, you will owe the tax.”

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