To paraphrase a popular bumper sticker, bear markets happen! Rather than bury your head, it’s moments like these that create some planning opportunities. Here are two bear market tax moves to consider.

Consider doing a Roth conversion when markets are down. Remember, the money invested in your IRA has not yet been taxed. But it will be someday. Fortunately, you are in control of when that moment arrives. What better time to pay those taxes than when the value of your IRA is temporarily depressed? Better yet, the IRS simply must accept a discount!

For the uninitiated, Roth conversions involve shifting – that is, converting – money out of your not-yet-taxed, traditional IRA and into a never-to-be-taxed Roth IRA. The amount you convert counts as taxable income.

Of course, while Roth conversions are smart when the value of your IRA is down, they become really smart when your conversion is taxed at a lower rate than it likely will be in the future. Figuring that part out requires some tax analysis skills along with a little bit of guessing about the future.

Now, Roth conversions are not an all-or-none proposition. They often are best done in smaller chunks and spread out over multiple years. You definitely want to be careful to not push yourself into a higher-than-normal tax bracket or trigger other oddities in our tax code.

Yet another bear market move involves your after-tax investments. Unlike your IRA that is taxed when you withdraw the money, the only items that result in taxes inside your after-tax accounts are your dividends, interest and the capital gains that you choose to realize when you sell an investment. Inside your after-tax accounts, the government doesn’t tax the chicken, just the eggs it produces.

Consider harvesting capital losses to use later on in the good years. If you look, you may notice quite a lot of yet-to-be-realized capital losses sitting inside your brokerage statements. You can harvest those losses for later use. The IRS will let you stockpile capital losses and carry them forward to offset your future gains.

To be clear, I’m not recommending that you simply dump a depressed investment just to realize a loss for future tax purposes. Instead, you could harvest losses and still leave your portfolio largely unaffected by (a) doubling your position in a depressed holding and then selling the high-cost shares after 31 days, (b) selling your depressed holding and waiting 31 days to buy it right back or (c) selling the depressed investment and reinvesting in something similar, but not identical.

Bear markets are hard to control and are often best ignored. But, when it comes to managing your taxes, Roth conversions and tax loss harvesting might satisfy your natural itch to take back a little control.

Jason P. Tank, CFA, CFP® is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com

Since the start of 2022, stocks have dropped about 20% to 30% and bonds have declined about 11%. For investors with balanced portfolios, you’d have to travel back in time for many decades to find a comparably dismal start.

Inflation is the primary cause, of course. In response, the Fed is aggressively trying to put the genie back in the bottle. Since March, they have raised short-term interest rates three times to 1.5%. And, there’s more to come. Expectations are they’ll hit 3.5% by the end of the year.

Focusing first on bonds, all of this begs a reasonable question, “With the Fed less than halfway done, shouldn’t we just get out of bonds completely?”

As I wrote last week, with the Fed’s future rate hikes already factored into today’s prices, I feel we’ve seen the worst of the bond market decline. In baseball terms, for bonds, I’d say we’re in at least the middle of the 8th inning.

Given this view, I’ve recently shifted more heavily into corporate bonds and have also modestly extended the average maturity of my clients’ bond portfolios. With interest rates now higher, I feel bonds offer both ballast and income. This combination of benefits has not existed in bonds for many years. In short, it feels like the wrong time to bail on the bond market.

Turning now to stocks, it’s been an equally tough period. Everyone is on recession watch. Officially, we don’t find out about recessions until one is either well underway, or already over. However, the stock market typically ferrets out a recession many months before one hits and sometimes it’s wrong. With stocks down this much, I think we’re getting a pretty good signal that a recession is probably on the near-term horizon.

This, too, begs another reasonable question, “With things looking so ugly out there, how much worse do you expect the stock market to get?”

With my view that inflation will soon peak and, in turn, the Fed will be done raising rates by year’s end, my base case is that we should expect a more typical bear market decline of 30% to 35% in stocks. Again, in baseball terms, for stocks, I think we’re sitting in the bottom of the 6th inning. This is not close enough to the end to exhale. But, it’s certainly not far enough away to bail out of stocks or even cling to cash.

Bear markets are tough to stomach, for sure. And, with bonds also in decline, this one feels like a one-two punch. But, it’s imperative to find resolve and prepare for the recovery phase of a bear market. It’s likely not as far away as it seems.

Jason P. Tank, CFA, CFP® is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com

Before this decline, most investors knew the level of income offered by bonds was far too paltry. To be fair, that was the case for about a decade. Like a frog adjusting to increasing levels of discomfort, the era of super-low rates and declining inflation led to a secondary focus on yield. The primary focus was not on bonds’ return on investment, but rather on their return of investment.

You have to travel back to the early ‘80s to see anything quite like the last six months, inflation-adjusted. Since the start of 2022, the general bond market has plunged about 11%. With stocks in a bear market, there have been no traditional places for investors to hide. Year-to-date, overall portfolio declines in the mid-teens are the norm, even for conservative investors. Once again, truly ugly.

How we got here is now a well-known story; a witch’s brew of a pandemic plus massive government stimulus plus supply-chain breakdowns plus war-induced shocks to both energy prices and food inputs. In a flash, it’s added up to a worldwide surge in inflation and, importantly, rising inflation expectations.

Late last year, the Federal Reserve abruptly pivoted from its overly-sanguine view on inflation. I mistakenly shared that sanguine view, to be honest. Ultimately, I do still believe our recent spike in inflation will subside. But, as far as clawing back the recent carnage, a bond market recovery will undoubtedly require more patience.

However, there is some good news. The worst of the pain in bonds is likely over and yields are significantly more attractive today.

It’s important to recognize that now, more than ever, financial markets act like betting venues. Investors don’t just wait around for outcomes to be revealed. Instead, markets lurch from one set of expected outcomes to another set, based on shifting sentiment and probabilities about an uncertain future.

The Fed is the bond market’s focus and their power largely resides in their “forward guidance” about the path of their interest rate hikes. With the power of their words alone – how far and how fast they’ll raise interest rates – they largely control the direction of the bond market.

Once the Fed’s policy path is fully believed – and the Fed’s credibility is restored – their entire rate hiking campaign will be fully absorbed by the bond market. At that point, the lurching will stop and the ballast of bonds will return. I feel that time is very near and – I think I speak for many out there – it won’t be a moment too soon!

Jason P. Tank, CFA, CFP® is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com

Q: This year my tax preparer gave me “tax vouchers” and said I need to send in a bunch of tax payments this year. Admittedly, I’m bad at keeping track of stuff like this. Is there another way to avoid making these quarterly estimated tax payments?

A: Yes, depending on your particular situation, there are multiple ways to avoid having to make quarterly estimated tax payments.

To avoid penalties and interest, you need to either (1) send in enough to cover most of this year’s tax owed or (2) just pay at least what you owed last year.

But, if you happen to have sources of income where taxes are already being withheld on your behalf, you can adjust your tax withholding to avoid penalties, too.

If you’re still working, you can certainly increase your tax withholding. If you are retired and get a pension or Social Security, consider tweaking your tax withholding from these sources. And, if you are taking out money from your IRA, ask your advisor or brokerage firm to withhold enough to avoid underpayment penalties..

With just a little tax planning, you can absolutely avoid the mundane (and painful) task of writing eight tax checks with those seemingly random deadlines!

Q: We recently sold our business and have a lot of cash sitting around. With things looking so uncertain right now, we’re wondering about the best path forward. Does it make sense to let it just sit there or should we invest the money?

A: Before investing any of it, you really should sit down with your advisor to develop a detailed retirement-income model. This work will set the stage for your longer-term investing. It will also give you a chance for thoughtful planning. Investing the cash really is a secondary decision that comes after a well-developed plan.

Keep in mind, there may be some smart tax strategies to follow in the early years of your retirement. For example, doing strategic Roth conversions or voluntarily taking some capital gains are worthy of analysis. Having the cash to help manipulate your tax picture is a key ingredient for these strategies.

Addressing today’s market uncertainties, I think the old-fashioned approach of using “dollar-cost averaging” is always wise. This is just a fancy way of saying that you should spread your investments into the market over a set time period. This technique avoids plunking it all down at exactly the wrong moment. Eliminating regret or even long-lasting emotional scars about investing, especially right off the bat, will help you stick to your plan.

Jason P. Tank, CFA, CFP® is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com

You’ve probably heard it before. Bear markets are par for the course in investing. Let’s go through some history to help calibrate your mind and emotions. In this review, my focus is on the four key metrics for bear markets; frequency, depth, length and recovery.

There have been nine bear markets in the past six decades. A bear market is technically defined as a decline of greater than 20%. To come up with my tally, I’m ignoring the truly weird Covid-shutdown collapse and recovery.

In terms of frequency, there was one bear market in the late-‘50s and then two more in the ‘60s, two in the ‘70s, and two in the ‘80s. The ‘90s were spared. And, as we all know, there were two big and memorable bear markets in the ‘00s, one at the start and one at the end. All told, on average bear markets show up every 5 to 7 years.

In terms of pain, the declines during each of these nine bear markets have been -21%, -28%, -22%, -36%, -48%, -27%, -33%, -49% and -55%. The average decline was about 35%. Excluding the three deep bear markets in that list, the average decline was about 27%. That should help frame the possible outcomes.

In terms of length, the bear markets reached their bottom in 2, 6, 8, 19, 21, 21, 2, 33 and 18 months, respectively. The average time it took before the eventual rebound was about 13 months. Ignoring the three deep bear markets, the average time to hit bottom was about 9 months.

In terms of time to recover, here’s how long each of them took to claw back the losses: 11, 14, 10, 21, 70, 3, 20, 56 and 49 months. The average time to rebound was about two years. Once again, excluding the big three, the average recovery was closer to one year. Naturally, the deepest bear markets took a lot longer to recover.

Based on this history, once or twice a decade investors can expect to experience a decline of 30% to 35% that dishes out its pain over about a year’s time. And, when it’s finally over, the typical bear market loss is fully recovered over about 12 to 24 months.

Over the past five months, the broader stock market is now flirting with a 20% decline. If this one becomes a bear market of the typical sort, we’re probably more than halfway to the end of the pain. A more-severe kind of a bear market is wholly dependent on the Fed, of course. In turn, the Fed’s future actions are wholly dependent on the path of inflation expectations.

I’m currently leaning toward the typical kind of bear market. Regardless, this is the moment for long-term investors to steel their mind on a well-reasoned game plan based on sound discipline. That is, in the end, the only true way to navigate the ugly anatomy of a bear market.

Jason P. Tank, CFA, CFP® is the owner of Front Street Wealth Management, a purely fee-only advisory firm. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com