Kintsugi
Kintsugi is the Japanese art of repairing broken pottery by mending the shattered areas with gold-dusted lacquer.
Here’s what it looks like:
The idea behind kintsugi is to take what would normally be considered a devastating event (shattering a piece of pottery) and repairing it in a way that highlights those fractures (by making them gold).
The goal is not to return the pottery to its original form; instead, the objective is to make it better.
Some of you may think you’re hearing the sound of shattering pottery each time you open your phone or computer to review your investment portfolio — you’re not alone.
After all, this is a historically bad year for investors. Here is some data to support that:
1) If the year ended today it would be the 6th worst year for the US stock market (S&P 500) dating back to 1926.
2) If the year ended today it would be the 3rd worst year ever for a 60% Stock / 40% Bond Portfolio (the traditional recommendation for more moderate investors).
3) And if the year ended today it would be the worst year ever for the US Bond Market.
Here is the YTD performance for each of these:
Again, queue up the sound of shattering pottery.
Okay, there’s no way around this, losses are hard to deal with. Especially when it seems we’re being unnecessarily impacted by a Federal Reserve whose personality disorder has them whipsawing between stimulus and austerity in the span of just a couple months (they were buying mortgage bonds to stimulate the economy in Q1 of this year, now they’re deliberately trying to crash the housing market)…
I’ll save the rest of my lambasting of the Fed and policymakers for a future blog. For now, here’s how we can attempt to mend the pieces back together into something even better than we started with. Here is some Portfolio Kintsugi:
Selling Losers, Buying Losers
Okay, so you have some losses in your portfolio.
In your taxable accounts (individual, joint, trust, etc.) you can look for losses and consider “harvesting” them. Here’s how it works:
Let’s say you bought “Technology Stock Fund XYZ” for $100,000 at the beginning of the year and now it’s worth $80,000.
You sell the fund and register this $20,000 loss.
Losses like this can offset other gains, like if you sold a piece of real estate, your business, or some other investment that’s at a gain. If you don’t have gains, you can “carry the loss forward” for years and years until you eventually do.
Going back to the portfolio — you bought the technology fund because you’re a long term believer in these kinds of stocks and you knew that volatility could happen in the short run. You don’t want to completely bail out on technology stocks, so you buy something similar to maintain your exposure to that market (things can turn around quickly, so if you liked an investment before then you probably want to stick with it now and not stay away too long). You can’t sell your original fund at a loss and turn around to buy back the same fund, so you’d need to pick a new holding, so try to find one that’s similar to your original investment.
When it’s all said and done, you end up with a loss you can use to offset other unavoidable gains, and a portfolio that’s still almost exactly the same.
Taking the bad thing (the losses) and highlighting them to make the original thing (the portfolio and your financial plan) better = kintsugi.
*Definitely talk with your tax advisor to see how this might impact your situation… or reach out to me and we’ll loop in the appropriate folks.
Buying Stuff on Sale
Rampant inflation has everyone looking at ways to save on their bills:
making sure lights are turned off
buying groceries in bulk from Costco
driving less to save on gas
strategically converting portions of a pre-tax retirement portfolio over to Roth IRAs at low relative marginal tax rates in pursuit of long term tax-free growth
Yea, let’s focus on that last one…
Let’s say you had $1,000,000 in your IRA at the beginning of the year, and that this $1,000,000 is now down 20% and is worth $800,000.
Someone (either you or your heirs) is going to have to pay income taxes on the money that comes out of your IRA. At the beginning of the year, that bill would have been based on a $1,000,000 IRA and now it’s 20% cheaper at $800,000.
Okay, so there’s no real way to feel good about a loss like this, but there are ways to try and make the most of it.
For those who think the market will rebound, it can make some sense to consider whether or not paying taxes today at 20% less is a good idea. The way to do that is Roth IRA Conversions. Here’s how it works:
1) You already own an IRA with some investments in it.
2) You think your investments are going to rebound and you want that rebound-related growth to occur tax-free
3) You “convert” some of that investment over to your Roth IRA.
4) When tax time comes around, you have to claim the amount you moved over to your Roth IRA as income and pay taxes on that amount.
Also keep in mind that we have a progressive tax system, so if your income is relatively low then you might benefit from lower top marginal tax brackets as well. For reference, here are the 2022 tax brackets:
So if you think your tax rate may go up in the future (either because lawmakers raise tax rates or because you think your income will be higher), then this is another chance to potentially buy taxes on sale.
There are a bunch of considerations you need to make, like what is your marginal tax rate, or how might claiming more income impact some of your other benefits, or can you meet all of the requirements for a Roth IRA, so be sure to get some help from your tax and financial advisor along the way.
[Speaking of help from your financial advisor, I’ve just opened my calendar for year-end tax strategy meetings. Here’s the link (clients will be receiving a separate email reminder to ensure they get scheduled).]
Wrapping Up
These are difficult times, and if you don’t want to hear another “don’t panic” anecdotal tale from your financial advisor, I get it. Frankly, I’m human too and just as you’re getting tired of seeing losses in your portfolio, I’m getting fatigued at facing a never-ending stream of bad news and trying to encourage investors to stay calm. But in a year where there’s basically been nowhere to hide from losses and market volatility, “stay calm” is a salient message. In addition to staying calm, here are some other things I think make sense for many investors:
make some tax optimization adjustments around the fringes of your portfolio
reinvest dividends and income back into your investments at today’s lower prices
evaluate your expenses and consider whether or not right now is the right time to buy that Ferrari you’d been wanting
start to consider the higher yields the safer investments are starting to pay (like money market, CDs, muni bonds, treasuries, etc.) and whether or not they make sense in your situation
Finally, just remember every other historically challenging situation and how rewarding it would have been to buy a long term buyer in that climate… And if you don’t have the cash to be a buyer, often times the next best thing is to be a holder of what you already have.
That’s all for now.
Onward,
Adam Harding, CFP
Owner and Wealth Advisor @ Harding Wealth
www.hardingwealth.com
480-205-1743
* Nothing in this blog should be considered investment, tax, or legal advice. For educational purposes only.
