As I begin to write this blog, I am pulling up my “Stocks” app on my iPhone. Let’s just say this, there is a lot more red on that app than green. And it’s been that way most days this year. The vortex of uncertainty that includes inflation, interest rates, supply chain, global discord and retail profits have led to a gradual, broad reduction in stock prices. And that naturally has people concerned; they see their balance sheets down in value and, assume that its impact is also lessened. That assumption, while understandable, is typically incomplete and, more likely, inaccurate.
Let’s take a step back. Why do people build wealth? In my opinion, the financial services industry makes two inaccurate assumptions in answering that question. First, they assume human beings are the same creatures, and that we all live by the ethos of Scrooge McDuck. That for all of us, there is no greater definition of pleasure than rolling around in our money; the more the merrier. Second, they assume that wealth is the only resource that is important to us.
In my experience working with clients, neither of those are true. The vast majority of clients do not care one bit about building wealth for the sake of having more, what they want is more impact. More happiness. More fulfillment. And they want to use their wealth to help them have more of those things. What they also understand is that wealth is only one resource to achieve impact, happiness and fulfillment. Another is time. In fact, for many clients, a significant value we brought to the relationship was advice on balancing time and money, given human beings, often without thought or intent, trade one for the other.
So knowing that humans create wealth to make a positive impact, the question is what can we do to increase that impact? First, it is to invest it in such a way that when we decide to convert those investments to money, money we can use for impact, we have more value than when we started. In other words, we make more impact when we buy low and sell high. But also, we make more impact when the wealth gets to the right people; people our clients care about. That means paying less in taxes and having more for impact.
Opportunities To Increase The Impact Of Our Wealth
With those overarching strategies in mind, this reduction in values gives us at least four opportunities to increase the impact of our wealth:
Use This As A Buying Opportunity
Again, our wealth has more impact when we buy low and sell high. When prices are dropping, instead of ruminating about the transitory value of your personal balance sheet, use it as an opportunity to grow more wealth and impact. In fact, one might think this idea is so obvious and apparent, everyone is doing it. But that is not the case. Human beings are wired, neurologically, to give into the fear of a falling market and follow the crowd; selling low rather than high. If, with the help of an experienced advisor, you can use the fear of others as a buying opportunity, these lower prices can help increase your impact.
Qualified plans and traditional IRAs have been phenomenal tools to help build wealth. Going back to the premise that impact is enhanced when assets go to the people we want them to, instead of the people we do not, the tax savings and deferrals in these types of vehicles have been proficient wealth creators. But, from a mathematical standpoint, an even more powerful tool is a Roth IRA. The distinction between a Roth and traditional IRA is in the taxation of the growth. Because a Roth does not tax the growth, presuming the investments appreciate, it provides more impact than an equivalent traditional IRA. The cost of that benefit is that the owner must pay tax on the value of the assets. Paying that cost to convert a traditional IRA to a Roth IRA is cheaper in a down market. Further, making the conversion when stock prices are low heightens the possibility of more tax-free, post-conversion growth.
For many of the clients we work with, they want to make impact on people beyond themselves. One of the ways they do that is by transferring wealth to those people, either during life (a gift) or at death (a bequest). A challenge to these transfers is they can potentially trigger a tax to the transferor. That tax is based on the value of the property given away. Therefore, it makes sense to give away property that has high appreciation potential and low value. That is the very definition of the current state of the markets. Further, under the law, there are tools in effect right now that make giving easier that will be gone in three years. Simply put, for those people who want to transfer property to make an impact on loved ones, taking action now should be a serious consideration.
Tax Loss Harvesting
Finally, when we successfully buy low and sell high, a portion of that growth cannot be used to impact people we care about; instead, it must be paid to the government in capital gains taxes. In contrast, when we sell stock for less than we paid for it, we can utilize that loss in value to reduce our tax bill, allowing those savings to be moved out of the coffers of the federal government and into the hands of the right people. Rebalancing stocks in these down markets, if done correctly, can give us the impact of those tax savings.
A mentor one time told me, “don’t ignore the opportunities inherent in any market.” While a down market is a scary thing, if we keep our heads and take advantage of its opportunities, our impact can be dramatically increased rather than lessened. If you would like to explore these strategies, please reach out to your Johnson Financial Group advisor.
About the Author
Joe Maier is a senior vice president, director of Wealth Strategy at Johnson Financial Group, where he works with family offices, business owners, and corporate executives to help them meet their wealth and legacy planning goals.