The Retirement Power Hour
The Retirement Power Hour
Bear Market Strategies
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Bear markets are tough to endure and can leave investors that are committed to long-term investing feeling a bit handcuffed. But, while bear markets are uncomfortable, they can also present unique financial planning opportunities that may help investors soften the blow and minimize the negative effects of steep market declines.
On this episode, host Joe Allaria will be joined by fellow Wealth Advisor, Jay Waters, as the two discuss five useful strategies to consider during a bear market.
For more information and references on material discussed, see the links below:
1. Correction or bear? 6 charts that explain market declines
2. What do I do in a bear market?
Learn more about Host Joe Allaria and CarsonAllaria Wealth Management by visiting CarsonAllaria.com.
Disclaimer: All material discussed on this podcast is for educational purposes only and should not be construed as individual tax, legal, or investment advice. Investing involves risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results. Joe Allaria is an Investment Adviser Representative of CarsonAllaria Wealth Management, a Registered Investment Advisory firm. Information discussed on this podcast may be derived from third parties that are believed to be reliable, but CarsonAllaria Wealth Management does not control or guarantee the accuracy or timeliness of such information and disclaims all liability for damages resulting from such sources. Any references to third parties are provided as a convenience and do not constitute an endorsement.
Welcome to the Retirement Power Hour Podcast, where you'll hear direct financial insights from financial planner, writer, and consultant Joe Allria, as he and his guests uncover key wealth management strategies to help listeners invest wiser and retire better. Now, here's your host, Joe Allaria.
Joe Allaria:Welcome everybody to the Retirement Power Hour Podcast. I'm Joe Allariaa and this is episode four. I'm looking forward to today's episode where I'll be joined by Jay Waters. Jay is a fellow wealth advisor here at Carson Allaria Wealth Management. And Jay and I are going to be talking about strategies in a bear market, investment strategies in a bear market. But first, since this is still a relatively new podcast, I wanted to share more about my goal, my target for the podcast, and help you understand why you should or should not listen. And the goal is simple. The podcast exists to help listeners invest wiser and retire better. And I'm sure most people can gauge what it means to invest wiser. We want to help you make wiser decisions to get better investment outcomes. And also want to help people retire better. Now that could mean a lot of different things for different people. It might mean retiring sooner. Because most people that I meet with, they tell me that they wish they could retire yesterday, if that were humanly possible. So it might mean retiring sooner. It might mean retiring with less stress. And that less stress may come from the strategies that we share, the investment strategies or the tactical tax strategies that you can go and implement. But it also might come from just the behavioral, psychological tips and things that we will discuss on the show to give you more perspective and to help you kind of get through the tough times, to get through the rough times in the market or the times of heightened uncertainty. So we will talk about both sides tactical, behavioral, but it all can lead to a better retirement, especially for those, again, that are already retired, or if you're right there hoping to retire soon, then we hope to help you invest wiser and retire better. So that's what we're going to be talking about. And then also you might be wondering who is this podcast for? And I was just at dinner at my parents' house recently, was kind of going around the table asking the family if they had listened to the podcast. And of course, this is family, so I knew the answers that I was going to get, but I still thought it would be fun to go around and watch everybody squirm as they told me why they hadn't got a chance to listen to the podcast yet. So I won't call each individual out by name, but let's just say there were several people that hadn't yet listened to the podcast. But I do have one faithful supporter out there. So, Dad, thank you for listening. I appreciate your support. But my brother, my non-financial advisor brother, did happen to ask me, is this podcast really for me? Is it relevant to me in my situation? And my short answer was, well, yeah. If you ever want to retire, then yes, it's for you. And while I do think there's some truth to that, I do think that a younger investor can get a lot out of this podcast. I have designed our podcast and our topics, especially for those that are hoping to retire within five to ten years, or for those that are already retired. So if you are within five to ten years of retirement or you're already retired, then I think you are the ones that are going to get the most out of what we're going to discuss on this podcast. So that's it. That's that's what the show is about. That's who I think will get the most out of it. So please subscribe and share with any family members or friends that you think might benefit from listening. And if you do that, I will greatly appreciate it. So as I said, I'm going to be joined today by Jay Waters. We're going to discuss strategies in a bear market. We'll talk more about what a bear market is. And as I will mention in the interview, we are not currently, as I record this, in a bear market. But if you're listening to this podcast at some point in the future, it could help you. Some of these strategies could help you at that time. And I'm pretty darn sure at some point in the future, we will find ourselves back in bear market territory. Now, we we have five strategies that we're going to talk about today. And I could tell you this: not one of them is about timing the market, jumping in and out of the market, trying to predict when it's going to go up and when it's going to go down. These are strategies that all require and all entail, for the most part, staying invested, but they are strategies, nevertheless, that could be especially useful during a bear market. So with that, I hope you enjoy this episode of the Retirement Power Hour. Enjoy. I'm going to be joined today by Jay Waters. Jay, welcome back to the show.
Jay Waters:Yep, Joe, thanks for having me, and I'm looking forward to our conversation today.
Joe Allaria:So, Jay, you were on the first episode, which was back in January, the premiere of the Retirement Power Hour. So, what's what's been new in your world since?
Jay Waters:Not a whole lot. Been doing a little bit of traveling. Got back from Florida about two, three weeks ago, and then heading out to Myrtle Beach about a week, week and a half from now. So doing a little bit of travel in this first quarter. Very nice.
Joe Allaria:Very nice. What's in Myrtle Beach? Just for fun, family, family trip, or what? What's going on?
Jay Waters:Just for fun, visiting some friends, and then uh went when we went to Florida, I actually got engaged. So no golfing for the warm weather, but but got engaged. So all good everywhere around.
Joe Allaria:Yeah, I did know that, obviously, but congratulations. We'll we'll say it publicly. Congratulations to you and your fiance. That's awesome.
Jay Waters:Thank you.
Joe Allaria:Today, Jay, we're talking about bear markets and strategies for a bear market. But I think it's important to preface that with the fact that we are not in a bear market. I've had a lot of conversations with clients as you know when they've come in for meetings lately. And it seems like most people think that we are doing worse, or I should say the market. The market is doing worse than than it actually has. And of course, the market could go back down from where it is today, but we're recording this, it's it's April 4th, and year to date, we are not even in the negative double digits at this point in time. So in our world, for the most part, nothing out of the ordinary. We we love to see black numbers, not red numbers, but uh for the most part, nothing, nothing too too out of the ordinary. Now, as far as bear markets are concerned, what what back when I scheduled this topic, there was the Russia-Ukraine thing had just come out, and we thought, hey, we we easily could be in a bear market. So we wanted to talk about this. I did a presentation, uh virtual presentation in 2020 after the COVID decline, which was a very steep decline, as I'm sure most of those that are watching can remember. But we talked about different things you can do when the market does decline. And we I guess we should probably start out by defining a bear market. So, Jay, I'll just I'll kick that off to you. Could you explain for all the listeners just what is a bear market?
Jay Waters:Yep. So a bear market is a 20% drop from the most recent high in the market.
Joe Allaria:And sometimes can be confused, right, with within with a recession.
Jay Waters:We we see that a lot where they clients or just people in general will tie hand in hand a recession and a bear market. Yeah. Where, you know, again, bear market is a 20% pull down, where recession doesn't really have anything to do with the stock market, it has more to do with GDP. And a recession is defined by two negative consecutive quarters of GDP. So one way or the other, if we are in a recession, it may not have adversely affected the stock market with the 20% decline. And same thing. We may have a 20% pullback, but we might not be in a recession.
Joe Allaria:So right. And we saw that in 2020, there was a period of time the economy was at a complete screeching halt, and the market did come down, but we came out of the bear market pretty quickly, whereas GDP did not recover as well. So they can be correlated, but they're not the same. But nevertheless, there are times when the market does decline 20%, and that is really to be expected. So we wanted to first set the stage of not only what a bear market is, how often do they typically show up, and what really any investor should expect when we're talking about being invested in the stock market, what's quote, normal and what is, you know, I guess more of a cause for concern. But even when we say things are normal, it doesn't mean that we're robots and we don't we don't feel the stress of investing in a crisis. And that was episode three. So if you want to hear a lot more about the behavioral side of the investing in a crisis and in a bear market, I would really encourage you to go back and listen to episode three because we spent a ton of time, Mark and I were talking about this. Mark Aleria here, another advisor at Carson Eleria Wealth Management, talking about the behavioral side of investing in a crisis and how to avoid making really big mistakes. But that's not really our focus today. Today is more about strategies that you can use. And so again, we're we're talking about bear markets and we're gonna kind of go into well, they're they're normal, it's expected, but we get it, it's uncomfortable. But sometimes it helps to get a little perspective and look at it from the numbers side. So, Jay, I will I will quiz you a little bit, a little pop quiz. I'm not gonna give you any uh any hints on this one, but I'm just curious, we're gonna talk about how frequent the different drops are. So if you had to guess, Jay, how frequently does the SP 500, the standard impores 500, how frequently does it decline by 5% or more? How frequently? How many times per year, or how many? What do you think?
Jay Waters:Yeah, 5%, probably two, three times a year.
Joe Allaria:Exactly right. Three times a year, good. And the length of that decline is about 46 days. So for the market to drop 5%, that that happens on average three times a year, and that's from 1948 to 2017. This is information put out by Capital Group, by the way, capitalgroup.com. We'll put the link in the show notes so you can see all this information. And the same goes for uh the 10 a 10% decline. That happens about once per year, and 15% happens about once every three and a half years, a 15% or more decline. So, Jay, again, what about a 20%? 20% is that bear market. So, how often do you think a 20% or more decline has happened? How often does that happen on average going back to 1948?
Jay Waters:Uh I'm gonna get a little wider range, probably six to eight years.
Joe Allaria:Six to eight years. Well, I'm gonna give you half credit for that. No, you're exactly right. It's six six point three years. So every six, about every six years or just over six years, on average, the market will decline by twenty percent or more. So they are more common than people might think they are. And the biggest thing that we need to avoid, again, talked about it last episode. The biggest thing we need to avoid is a behavioral uh knee-jerk reaction in the middle of that. And what I mean is people getting out of the market, people saying uh it's we're down 20%, this is not good, this is going nowhere fast, I gotta get out of the market. Because the average 12-month return after a steep decline like this, after a decline of 15%, the average 12-month return has been 55%. So that's pretty significant. You know, if you look again, this is going back again. Go you can look at the show notes, you can you can see where this data comes from. But the subsequent 12-month return after a decline of 15% or more in the market is 55%. So if you get out of the market when things are bad, there's a decent chance that you're gonna miss out on a really strong return.
Jay Waters:Yeah, I I couldn't agree more, Joe. And when it comes to, you know, you talking about people maybe jumping out of the market, it's one, it's impossible to time when the market's at its high, but it's also just as impossible to time it when it's at its low. Right to get it right, you'd have to guess correctly not only on when to sell, but also when to buy back in.
Joe Allaria:And it's yeah, I mean, it's when when the market is going down, I can think back to 2020 when we're when the market was down 20, 30 percent, it feels like it's gonna go down 60 percent. I mean, things when things are bad, they feel really bad, right? That's why that's what causes the first 20% decline. But somewhere along the line, historically, things have turned around. And you know, we'll just keep sharing some of these statistics here. The average bull market, so when we talked earlier, the average bull market lasts for 71 months and has gone up 263 percent cumulatively. So that's obviously not per year. The average bear market lasts 14 months and goes down an average of 33 percent. So these bear markets last nowhere near the the duration that bull markets last, historically speaking, and they go down nowhere near the amount that the bull markets have gone up. So that's the historical picture and the perspective that we hope that you take away from this if you're listening. Because we are going to talk about strategies in a bear market, but first just understand these they're common, they are typically short-lived. When you look at this, it's a lot of data. You know, this is going back a long time. And I think the mistake that investors can make is again, they the market goes down, they take the money out, they want to wait till things get better and then put their money back in. But guess what? If you do that, you miss the upside, and it might very well be too late to regain any of what you missed out on.
Jay Waters:Yeah. And I think it's important to go over those numbers, though, Joe, like we are going over, you know, how long does a bull market last and what's the average on a on a bear market?
Joe Allaria:Yeah.
Jay Waters:If we educate and if our clients are knowledgeable of those time periods, then when that time comes, it goes, oh, it's almost like, hey, this is supposed to happen.
Joe Allaria:Right.
Jay Waters:You know, it's nothing out of the ordinary. We know that the market should pull back probably around 20% every 6.3 years, like you said. And it's just right, if you know that those are the expectations, then when that time comes, it's a lot easier.
Joe Allaria:Absolutely, 100%. If you're out there listening and you know what is to be expected, like you said, Jay, then you're not spooked or freaked out when these things happen. Now, we on the advisor side obviously are not spooked or freaked out. As I typically explain to clients, we know the market's going to go down. We know we're going to have bear markets. We just don't know exactly when or why. So when COVID struck and the market just dove downward, that was not anything out of the ordinary from a finance from a stock market point of view. Of course, the COVID part of it was very unexpected and very new, just like many crises are. There are things that we haven't seen in a long time or things that we maybe haven't seen at all. But the reaction and what happens in the market is not typically something that's unexpected. And another thing to just remember is the market is not this really mystical system that's out there that no one can really understand or or know about. It's really made up of people. And people, Jay, my belief and our belief, I think, is that people are smart, they are resourceful, they are able to bounce back from big tragedies. And when you tell the top companies in the world and you throw a challenge at them, these are these are some of the best that we have, some of the best minds. My money is on the fact that they're going to figure out this sort of new environment and then figure out how to overcome these challenges, come out with products and solutions that the rest of us and the world still want to buy. You know, even if you do have wars abroad or anything, these different challenges that arise, my money is that we as a people are going to continue to innovate and come out with things that other people are going to want to have. That's the market. It's just made up of a bunch of people. And as I've said, if if someone told me I couldn't be a financial advisor anymore because the government came out with a government-sanctioned advisor robot, I'm not just going to go sit on my bed and and cry about it and never come out. I'm going to use the skills that I have and and innovate and try to and pivot and come out with something else. And there's a lot, a lot of people out there that are in those in that same position as a business owner who will do the same. But with that, Jay, let's talk about these strategies. We got five strategies today. When we're in a bear market, again, we are not in a bear market right now, but you might be listening at some point in the future where we are in a bear market. If you are, we know it's not comfortable. Uh it's typically something that's not in your control, so don't fear. But there are a few things that you might be able to do to capitalize on the volatility of the market. And the first one, Jay, is tax loss harvesting, a strategy that the listeners may have heard about, but it really all stems back to capital gains and a way to reduce capital gains now and for the short term in the future. So can you just explain a little bit about capital gains, what type of accounts a capital gains tax might apply to?
Jay Waters:Yep. So when we talk about tax loss harvesting, it's going to apply to brokerage accounts, individual accounts, not your IRAs, just individual brokerage accounts. And the way tax loss harvesting works is when you let's take a take an equity, for example, and you you sell it at a loss. You're going to then use that tax write-off or that loss of whatever you incurred, basically whatever you bought it for, your cost basis, minus whatever you lost. And then you can use that to offset some capital gains that you may have from selling an equity that you made money on above your cost basis.
Joe Allaria:So we'll just let me just pause there just for a second. So these are not I rays, not rough IRAs, but when we when we sell a security, a stock, a mutual fund, and we made money. So we bought it for 10 grand, we sell it, it's worth 15 grand. I had $5,000 of capital gains. And then the $5,000, I would have to pay capital gains tax on that $5,000, depending on my income. Yep.
Jay Waters:And the the brackets you have for capital gains, when we talk in that relation, you know, you have three brackets. You have 0%, 15%, or 20%. So when we talk to our people that are, let's say, married finally jointly, right? If you make less than 83,350 joint, you're not going to pay anything on cap gains. If it's anything over that number, you're in the 15% bracket, and then anything up to 517,200. Yeah. Yeah. And then if you're above that 20%, right? Yep. Yep.
Joe Allaria:And this is all for 2022 to 2022 tax year. Yeah. If you're a single filer, and and and by the way, I guess we should we should mention this though, that that these numbers are taxable income. So I'm going to ask you what the difference is in just a second. But taxable income for a single person, $41,675. If you're below $41,675, then you actually pay 0% capital gains tax rate. But if you're between $41,675 and $459,750, they could have rounded, I feel like, and made that a lot easier. But you'd pay 15%. So the moral of the story is most people pay 15% capital gains tax. Now, Jay, real quick, because this is based on taxable income. So what is the difference between taxable income and gross income?
Jay Waters:Yep. So when they look at cap gains on taxable income, that's them saying, okay, you've made your standard deduction, you've taken your maybe some 401k deductions, pre-tax deductions. So it's whatever you're actually getting taxed on at the end of the day, not what that gross number is, not what that's not your adjusted gross income.
Joe Allaria:So just because if you're if you're married filing jointly, let's just say, and you you had an adjusted gross income of a hundred thousand.
unknown:Right.
Joe Allaria:Well, and you even just took the standard deduction.
Jay Waters:Yeah, the which is 25.9 for this 2022 tax year.
Joe Allaria:Yeah. So you you could still actually be in that zero percent range for capital gains.
Jay Waters:Yep.
Joe Allaria:So that that's just important to differentiate because a lot of these tax strategies really hinge on either gross income, taxable income. So it's important to know that. Now, now we can finally get to talking about tax loss harvesting again. So we talked about what happens if you have a gain. So when the market's down, someone may have an unrealized loss, meaning if they sold their fund, they would realize a loss. And that's kind of what tax loss harvesting is. But why would someone want to do that, Jay? Because I've always heard don't sell, why would you want to sell something at a loss from an investment standpoint? You know, I've heard buy low, sell high, not buy high, sell low. So why would someone want to do that?
Jay Waters:Right. There's a couple of reasons you know why you'd want to do it. One of them simply could be you're just looking to rebalance your portfolio to the proper allocation and saying, hey, let's let's capture some of these losses to then offset some of these gains that we may have. The other way or other reason you may do some tax loss harvesting is you again, you see a good opportunity, even though you are taking a loss on paper, um, then you can reposition that fund or that equity or whatever it is that you sold into something that is not identical.
Joe Allaria:So from an investment standpoint, right, we don't want to sell and then just stay out of the market or not be invested. So some people might say, well, um, okay, this is great. I have fifty thousand dollars of unrealized losses across different funds. I'm just gonna sell all of them so I can lock in the loss. I'll just turn around the next day and just buy them right back. Can they do that?
Jay Waters:No, you cannot do that. IRS knows better than that. They they do everything they can. So, yeah, what what that would be called then is if someone tried to do that, Joe, ish sale, right? Yep, wash sale. So wash sale is if you were to rebuy those same identical securities within 30 days of when you sold it. That you wouldn't be able to take that that write off. It'd be basically be a wash.
Joe Allaria:So when people try to implement tax loss harvesting, you can't sell it, they can't sell the security of the fund and then buy it right back. So what you had mentioned before, the strategy is you you sell the position or the positions and you lock in the loss from a tax standpoint. But let's just say you had ABC large cap fund, a certain sector fund that you could sell, and then again, you could go buy XYZ large cap fund. Are they the same fund? No. Are they very, very similar? Yes, they're very similar. And you would do that because you don't want to not be invested, you don't want to sell and then have that and then stay out of the market for 30 days and have that fund rebound, and then you miss all the rebound, right? There's more the the main thing is the investment return. We don't want to let the tax tail wag the dog here and just say, well, I want to get the loss because that's great from a tax endpoint. Yes, it is, but you still lost money. So we don't want to lose, we don't want to actually lose money. So we want to stay invested, and we can do that by selling the one fund, locking in the loss, and then buying something else that's that's gonna keep us in the market. And so it's important when you're doing that to try to make sure that again you can find something that's gonna capture any rebound that might occur. But then those those losses now they can go to work for you and they can offset two different things. So, what what would be the first thing that these losses can offset, Jay?
Jay Waters:Yeah, they can offset capital gains from another sell of another security where you made money on that in your brokerage account, or it could also be used for any other type of gain, capital gains you may have. It could be maybe a rental property you sold, and you can take that loss and write it off towards something else.
Joe Allaria:So maybe I already had gains in that year, or maybe I could do this and then I'd and then maybe the market rebounds and I'm gonna have gains later in the year, you can do that. Actually, there's there's a third option, and and that's if you don't have any gains in that year, but what about three years from now or four years from now?
Jay Waters:Yeah, you can carry forward those losses into the future, and then you can also offset your income for that current year of up to three thousand dollars.
Joe Allaria:Right. So you can offset any amount of capital gains.
Jay Waters:Yep.
Joe Allaria:But if you don't have the capital gains, you can offset three thousand dollars of income. So that's just your wages, whatever. Yep. And then let's just say I have a hundred thousand dollars of losses that I locked in and no gains in that year that I did it, I can use three thousand of the losses to offset income, and I'm gonna carry forward ninety-seven thousand dollars of losses to the next year. That means if the next year I have ninety-seven thousand dollars of capital gains, I can I can trigger all those gains and not pay any capital gains tax because it would those would wash out. So it gets it puts you in the driver's seat a little bit to have a little bit more control and a little bit, a little bit of protection against the potential tax that you might pay. Again, you're not getting out of the market, so it's not hurting you from that standpoint. You're just giving yourself some losses, which could really help if you are in a higher tax bracket. Maybe you're gonna use those losses while you're in your highest earning years. And then when you get to retirement, maybe you don't even have capital gains tax because your income, your taxable income is in the 0% range. So now you got all these losses that can just continue to offset your income at $3,000 a year. So um gives you some more options. Now that's tax loss harvesting. I wanted to also mention quickly, which is not necessarily a bear market strategy, but tax gain harvesting, which it speaks to that 0% bracket. If I'm a single person, I want to, if I'm under $41,675 in taxable income, then I don't have any, I don't have any capital gains tax. I wouldn't owe any capital gains tax. And I've had this come up where single individual clients of mine have had taxable income of maybe $30,000 and they have unrealized capital gains, meaning that they hadn't sold anything yet, but they could sell it, and we've done that. So they're at $30,000 of taxable income. We could sell, you know, 10, $10,000, $11,000 in capital gains, trigger that much in capital gains, and they wouldn't actually pay any tax. So you just sell it, buy right back. So there's tax loss harvesting, gain harvesting, but tax loss harvesting is the one during a bear market. Okay, Jay, that was a lot of information on tax loss harvesting. Let's go to the next one, which is Roth conversions. Now, what is a Roth conversion? Why is it good to do in a bear market?
Jay Waters:Yep. Well, before I explain like what a Roth conversion is, I think it it's important to set the table on the difference between probably a Roth and then a traditional IRA. So traditional IRA you're putting into with pre-tax dollars, dollars that you're writing off. So take the write off, grows taxable, you pull out taxable. Roth IRA, you go ahead and pay the taxes now when you contribute, but then as it grows, it grows tax-free, and then you can take out tax-free. So when we talk about then Roth conversions, you're taking your traditional IRA pre-tax money and converting it to a Roth IRA. So you're moving it from that taxable bucket to that non-taxable bucket.
Joe Allaria:Right.
Jay Waters:Um, and then why it makes sense to do it in a down market is whenever you do a conversion like that, that amount that you convert from your traditional IRA to your Roth shows up as income.
Joe Allaria:So that is taxable. If I move over if I move over fifty thousand dollars from an IRA to a Roth IRA, then I do have to pay taxes on that fifty thousand at that time, income, ordinary income tax.
Jay Waters:Right. So the a good way to put a calculation around it is let's say you had a hundred grand in that traditional IRA that you were gonna convert over. So you're gonna have a hundred thousand dollars show up as income through this conversion. Right. Well, if the market's down 20 or 30 percent, let's say it's down 30 percent, now you're converting 70 grand instead of a hundred grand. Same amount of shares, same amount of shares, just uh the shares are at a lesser value at the point.
Joe Allaria:Yep.
Jay Waters:So then you would save, let's say you're in the 22% tax bracket. Well, you're gonna save 22% then of that 30,000 that you would have converted, right? Which is about sixty six hundred dollars in in taxable dollars that you would have had, yep. Um, which you no longer do. So Roth conversions you usually a good idea depending on the circumstance, but if you're already gonna do a Roth conversion, it makes even more sense during a bear market.
Joe Allaria:Yeah, yeah, it and exactly. They could make sense in any environment, but it's kind of the icing on the cake because what we expect after the conversion is that the 50,000, the 100,000, whatever you moved over, would you say 70,000? 70,000. You converted 70,000 and the the 70,000 was a hundred shares of a specific fund, right? Well, the hundred shares were just previously worth a hundred thousand dollars. So what we expect is you convert the one hundred shares over and you only pay taxes on the seventy thousand. The expectation is those shares would rebound back to their original value and then continue to grow. So the thirty thousand dollar the potential rebound is now tax free. Tax-free. So before it was all going to be taxable, the money declined in the IRA, then you moved it over, then it appreciated back in the Roth IRA. Now there's no guarantee that that rebound is going to happen and when it will happen and all that stuff. That's just investing in the market. But the expectation is, like we said at the beginning, these bear markets are temporary or have been and have been short-lived. So the expectation is that yes, things would rebound. And I would much rather have growth in a Roth IRA instead of a traditional IRA. I want growth in both if I, you know, if I can, but I want as much as I can in a Roth IRA because all that growth is tax-free and that's all my money. The money in a traditional IRA, not all my money because it hasn't been taxed. And the IRS is going to lay claim to some of that. So moving on, Jay, the next next strategy. So we've kicked we've hit tax loss harvesting and we've hit Roth conversions. We've got three more to go. Number three is just portfolio rebalancing. And that could be something that would be good to do in a bear market. Now just explain a little bit if you could, Jay, what is portfolio rebalancing?
Jay Waters:Yep. So especially during a bear market, portfolio rebalancing, some sectors may get hit harder than others. Right? You have large cap, you have small cap, you have value and growth. Yep. We saw it in 2020, right? Certain sectors got hit much harder than others.
Joe Allaria:Yep.
Jay Waters:So it's a good opportunity to capture some of those gains, buy low, sell high, and then just reallocate or reposition to that proper allocation that they were initially wanting.
Joe Allaria:And maybe even stock to bond, you know, because people somewhat are familiar with, you know, I've got some stocks and I've got some bonds in my portfolio, the old traditional retiree model, maybe that's 6040. Well, let's just say you wanted to be 6040 going into the crisis. Okay, so you were 6040, but then once we hit the whatever the crisis is, your stocks, the 60%, got hit harder than the bonds. So then all of a sudden you're sitting at a 50-50 allocation. Well, you want to be 60-40 and you're 50-50. So in that case, you might say to yourself, Well, I'm going to sell some of the bonds and then move those over to the stock side because my allocation is too high in the bonds. It's not high enough in the stocks. So again, buy low, sell high. Portfolio rebalancing is good to do at any time. It could be a good strategy in a bear market. I will tell you, it is not comfortable. You know, that's the hardest thing, is on the behavioral side. It's just not comfortable to do that because we might see the market down 20% and say, hey, this is a great time to rebalance and move some bonds into stocks. Guess what happen, guess what could happen after we move more into those stocks? They could go down even more. Yeah. But we believe our our belief is that again, that that would be short-lived. So it's it's often to try to separate the emotions out of these decisions and just rely on logic. And uh, but your money is personal, and it's hard to do that sometimes. So that's what's good to have to have an advisor, to have someone who's reassuring you that yes, this is the prudent thing to do. All you can do is what's prudent. A lot of people think, well, it's only prudent for me to get out of the market because the market's down 20%, and that would be that's why it's prudent for me to protect my money. Well, you know, I look at it and say, we have years of historical data that shows what happens after bear markets. We showed you earlier, the average 12-month return following a 15% decline is 55%. So in in our minds, we're saying, well, no, the prudent thing is not to go to cash, the prudent thing is to buy as much in stocks or get as much in stocks as we possibly can. Yeah, and that's a good segue to our number four strategy, which is simply if you are in a bear market and you have cash on the side, put your cash to work.
unknown:Yeah.
Jay Waters:And when we talk about putting cash to work, some people think you see it down 20, the market down 20%, and you say, Well, I'm just gonna wait for it to go down to 25 or 20, 30 percent.
Joe Allaria:Why not?
Jay Waters:And again, it's impossible to time the market, not only on when to sell at the peak, but also when to buy back in at the bottom.
Joe Allaria:Right.
Jay Waters:To where it's just you pick a point whether and you say, Hey, this is when I'm gonna start putting my cash to work and I'm gonna start buying stocks. Yeah. Because it it's just impossible to go to the bottom.
Joe Allaria:So, yeah, what I would actually say too is first of all, if you have cash in this environment, you know, or this hypothetical environment that that we might be in in the future, the bear market, it might not be a good reason that you do have cash because if you have been, if you have been just waiting for this to happen, okay, that that wouldn't be advised because you could be waiting a very long time.
unknown:Yeah.
Joe Allaria:Like we said, I mean, in in 2020, we got down, I want to say it was about 2300 in the SP 500. Actually, excuse me, 2,500 in the SP 500, March 23rd, that was looks like that was the close according to my stock app on my phone. So roughly in that ballpark of 2500. If you said, I'm gonna wait until because I think this thing is going down much further, right? And I'm gonna wait until the SP 500 goes to 2000. Well, guess what? That never happened. And since that point in time, March 23rd of 2020, to again through here recently, we're up over 75%. The SP is up over 75%. So that's 75% that you're not gonna get back unless we were gonna go down again, which again, it may never happen. Yeah, and the same thing happened after 2008, and the same thing inevitably happened after you know every past downturn that we've had. We don't always return to those lows because, like we said, it more the bull markets last longer, and sometimes even with the decline, you just never get down to those previous lows.
Jay Waters:And and two things with that, Joe, is one, sometimes it it stings even worse knowing what you missed out on the upside than if you would have rolled that roller coaster on the downside. So, you know, well, it should get it. Yeah, even if you do get it, let's say you do guess it right, and you're like, hey, you know, I I got out right before I started dipping down, and it I saved myself the 30% decline, but you never jump back in and then it goes up 75%. Again, that sometimes stings worse than the 30% you save from losing.
Joe Allaria:It it probably should sting worse because again, there how are you gonna get that back?
Jay Waters:Yeah.
Joe Allaria:The 30 it will at least when the market's down 30, it stings. But the general consensus, especially in our view, is that hey, this will recover, and I'll get back to where I was. When you miss out on the upside because you were sitting on the sidelines, how are you gonna get that back? You never you never will unless the market comes back down. So that that's the hardest to me, that's the hardest decision in investing to make. And you never want to have you never want to force yourself to make that decision of, geez, I just missed out. Like we're sitting right now. Let's just say, let's just say you're out there, we're gonna give you guys some grace, those that are out there that maybe you know were in that boat after 2020, and you thought the market, you thought the SP was gonna go down to 2000, and it never did, and and you haven't got back in. And we're in 2022 now, and we've appreciated 75, almost 80 percent since that time, since that point in time. What are you going to do now? Do you just do you just chalk it up to yourself and say, look, that was a bad choice. I I messed up, I'm just gonna count my losses and I'm getting back in because I don't want to miss out on any more. Or do you again, do you wait thinking, well, surely it's got to come down at some point? I can't tell you how many times I've heard that. Surely the market's gonna come down at some point. Well, it will, but where is it gonna come down from? Is it gonna come down from where we are now, or is it gonna come down from where we are 50% from now? Yeah, and that's a question that we can't answer. And that's why we would say if you have cash, put it to work, meaning invest it, diversified, low-cost portfolio, get it in the market, get it invested, because you just can't, you never know when that next downturn is gonna come. And if you keep your folks on the long run, it really shouldn't matter.
unknown:Yeah.
Jay Waters:And to get it and to really quantify and say, hey, the market's gonna come back to that, like let's say it's 2300 mark in the SP, that's almost a 50% correction now. Where before that time it was only really a 30% correction, right? And 50% corrections, although they are possible, they're not as as common as your normal 20% correction.
Joe Allaria:Yeah, so it's a it's a tough, it's a tough, tough, tough position to be in. Even if you missed out, you got out of the market for a week because you got spooked on, again, war news or whatever it may be, and you know, you saw the market was up five percent and you were out. You know, if you have a million dollars, five percent, that's 50 grand. So if you get back in at that point, you're basically saying, Man, I I just missed out on 50 grand and all the compounding that can come from it in the future because I jumped out. And you're in the same boat. Do I get back in or do I wait? So it you don't want to put yourself in that position to make that call. And the la, but the last strategy, Jay, just in the sake of time, the last strategy for a bear market is something that is not very well known, but it's called a QHFD, qualified HSA funding distribution. Now, this would only apply to people out there that do have an HSA, a health savings account. We have uh resources on our website at Carsonalaria.com about health savings accounts, the benefits. Um, but essentially, what this allows you to do is it allows you to transfer money from your IRA over to an HSA or a health savings account. Now, the HSA is the only investment vehicle that I know of where you can get a pre-tax. The money goes in pre-tax, so you get a deduction when you put money into an HSA, and then it can grow tax-free and be withdrawn tax-free. So this is similar to the Roth conversion strategy, which we talked about earlier. The benefits in a bear market are similar. If you roll money over from an IRA to an HSA, there's no taxes when you do that. You can do up to there is a there is an annual limit, an annual uh rollover amount that you can do. Yeah, I think we're up to 7,300 now for a family for 2022. But when you do that, and if you did invest, because you can invest the HSA, then that's tax-free growth that you can get. So again, whatever the decline on that money, you move it over, then it grows. And hey, this might be something to good to do in any environment. So if you've never heard of that or you have an HSA and you would like to be funding it more, but you just haven't been able to, but you've got IRA money out there, this could be a really good strategy. Not very well known, but something that could make a lot of sense.
Jay Waters:And you can only do that once in your lifetime, right, Joe?
Joe Allaria:Thank you. Yes, that is very important to know. It is a once, literally a once in a lifetime opportunity opportunity. Literally, yes, once in a lifetime. And we are not making that up. So, yep, check that out if you have an HSA or ask us questions. But Jay, that those are the five strategies. Anyone listening now, let me remind you, we're not in a bear market right now. For anyone listening in the future that maybe you are in a bear market and you found this episode because you wanted some tips on it. Well, we would encourage you to stay the course, to take some of these things into consideration, to sit down with an advisor. If it's us, if you're a client of ours, again, reach out, sit down, we'll talk through these things. We believe this too shall pass, and it has each and every time that the market has experienced these challenges. And I would, I would again echo that the reason is not because it's just the market and we don't know what it is, and it's a mystical being that no one understands. No, it's people, and people are resilient, especially as a as a group, uh, as a society. We have overcome, we're all still here. We've overcome literally every every calamity that's that's ever been known to man. We're we're all we're still here, and I believe that will continue. And I think that bodes well for things like the stock market. So, with that, Jay, thank you very much for coming back on the show for episode four. It's always good to have you on and get your insight. Hopefully, we can have you back soon.
Jay Waters:Absolutely. Thanks for having me, Joe.
Joe Allaria:For everybody else, please make sure and visit our website at Carsonalaria.com. And please, as a reminder, share this podcast on Apple iTunes, Spotify with your friends and family to anyone that you think might benefit from listening. We are looking forward to coming on on our next episode and talking with Scott Carson, who is a former partner and a senior wealth advisor with Carson Aleria Wealth Management. Scott is a 30-plus year industry veteran, and we're going to be talking about these designing your retirement life. So it's one you if you're near retirement or you're retired, you definitely want to tune in to that one. So thank you everybody for joining us on today's episode. Join us next time on the Retirement Power Hour, where we help listeners invest wiser and retire better. Take care.
Speaker:Thank you for listening to the Retirement Power Hour Podcast. All material discussed on this podcast is for educational purposes only and should not be construed as individual tax, legal, or investment advice. Investing involves risk of loss, and investors should be prepared to bear potential losses. Past performance may not be indicative of future results. Joe Allariaa is an investment advisor representative of Carson Allaria Wealth Management, a registered investment advisory firm. Information discussed on this podcast may be derived from third parties that are believed to be reliable, but Carson Allaria Wealth Management does not control or guarantee the accuracy or timeliness of such information and displays all liability for damages resulting from such sources. Any references to third parties are provided as a convenience and do not constitute an endorsement.
