It is always worrisome when the market goes down. Opinions about the end of the world abound, we are told that it is different this time, and investors are urged to put their money in cash – by everyone but their trusted, fiduciary advisor that is.
The market goes up and down, folks. Embrace it! That’s right. Celebrate market volatility because without it, investors would enjoy little or no return beyond that of inflation or certificates of deposit. Prudent investors seek to maximize their after-tax market returns adjusted to their tolerance for risk. Huh? The market goes up and down. With the help of a trusted advisor and Monte Carlo modeling to examine and understand a range of possible outcomes, an investor can determine their tolerance for portfolio risk. And, given that some assets (stocks or bonds) are more tax efficient that others, it is important to locate those assets in either a pre-tax or after-tax account to maximize the tax efficiency of those investments. For example, large company stocks are less volatile than small ones so they are ideally located in a personal investment (taxable) account. If they go up in value, nothing happens until they are sold at which time any gain upon sale is capital gains tax with a maximum rate of 20%. If they go down, the losses can be captured (by selling the securities) and saved for the future – perhaps to offset the gain on the sale of one’s practice down the road. At the same time, bonds paying interest (ordinary income) or more volatile stocks are better placed in a tax deferred account (IRA or 401k) where the taxable income is sheltered. Mutual funds that hold international stocks render foreign tax credits that may be used to offset federal income tax, so placing those assets in a taxable account may be prudent. Everyone’s circumstances are different and your Dental CPA/Wealth Advisor is well equipped to help structure the most tax efficient strategy using a portfolio of low-cost, globally diversified mutual funds.
But don’t take my word for it. Here is a video from Dimensional Fund Advisors in which founder David Booth discusses principles that may help investors during periods of increased market volatility with Nobel Laureate, Eugene Fama and his “Three Factor Model” collaborator, Kenneth French. I always enjoy hearing from these guys and believe you will too. Perspectives on Market Volatility.