The past few months have served as a reminder that financial markets can go down in surprising ways. And history suggests that at some point we’ll once again be surprised by an unexpected path taken by the economy and various asset classes.
With that in mind, there are steps commonly used by very wealthy investors to safeguard and even grow their wealth during downturns.
Smart Business spoke with Bob Bove, Wealth Advisor & Certified Exit Planning Advisor at The 4:8 Group, about the playbook wealthy investors use during downturns.
What tactics do the wealthy use during downturns?
Gifting assets to one or more irrevocable trusts is a common strategy in estate planning, wealth protection planning and the like. A big downturn can enable investors to gift higher amounts of money at a lower tax rate, and potentially enable more tax-deferred growth of the gifted assets. Ultimately, gifts of stocks at depressed prices can potentially help secure a better financial future for the person or people you want to benefit from your trust.
In cases where significant, wholesale plan changes seem necessary — shifting to an entirely different investment style or approach, for example — a market downturn can be an advantageous time to do it. It can be an opportunity to clear out large swaths of an existing portfolio in a tax-efficient manner that ends up costing less in capital gains taxes than might have otherwise been paid.
Rough economic times can present bargains beyond equities. For example, entrepreneurs might find other businesses to acquire, collectors of art and artifacts may buy strategically, real estate investors often expand their search criteria.
It’s become increasingly common for high-net-worth individuals to convert their traditional IRAs to Roth IRAs, which feature, among other benefits, tax-free withdrawals in retirement and continued tax-free growth. Converting when the market is down means paying a lower tax rate in comparison with the eventual growth of the account, although it can mean a large tax bill when the conversion occurs.
Big economic and market surprises often are accompanied by changes in investment leaders and laggards. That’s why some affluent investors will look to position themselves in what they see as tactical, emerging opportunities arising from the changing dynamics of world economies and other factors.
The affluent tend to recognize that a period of turbulence is not the time to hide their head in the sand. Instead, they generally make a habit of being self-reflective. For example, some families’ philanthropic focus shifted during the pandemic toward health care-related charities.
What can get in the way of a sound strategy during uncertain times?
Strange times can cause nervousness that leads to emotional financial decisions. Those tend not to end well. Avoid panicking and instead find ways to stay the course — as long as the existing plan still makes sense based on current objectives.
Facts are allies here. For instance, if evidence shows that bear markets are relatively rare events or that markets often stage recoveries from downturns at a rapid pace, it can help bring the thinking brain ‘back online.’ Seek data that can show the bigger picture and historical trends.
However, facts aren’t always powerful enough to stave off fear. One strategy recommended by behavioral experts is to assess whether you’re engaging in so-called catastrophic thinking. Thoughts such as, ‘The entire financial system is crumbling’ can be checked by asking, ‘Is that the most likely outcome? Or, is there even a 10 percent chance that happens?’ This type of reality check can help shut down the leap in logic that the worst is bound to happen, which can help prevent costly shortsighted moves.
Not all of these strategies may be appropriate for every investor as the right decisions depend on a broad range of individual factors. However, the affluent generally look to be prepared to weather storms, stay calm in the face of stress, be opportunistic if it makes sense, evaluate whether they need to make any significant changes and get professional guidance to help determine the best moves to make. ●
INSIGHTS Wealth Management is brought to you by The 4:8 Group.
