It has been a tough year for the market, battling the headwinds of record inflation, rising interest rates and Russia’s war in Ukraine. However, some portfolios may be more battered and bruised than others, depending on their investment selection. In times like these it pays to revisit the fundamentals and determine whether any adjustments need to be made to your financial plan.

Investment selection

Diversification is key with exchange-traded funds (ETFs) and mutual funds being a safer space for individual investors.

Individual securities such as Meta Platforms Inc. (which owns Facebook and Instagram) should not make up the bulk of the average investors’ accounts.

The S&P 500 is down 17% year-to-date and an imperfect benchmark, but the diversification it brings is far better than Meta’s 45% decline.

Speaking of Meta, the recent underperformance of growth stocks (-20.8%) to value stocks (-12.4%) illustrates that price still matters when buying expensive stocks (or baskets of stocks in the case of funds) relative to their earnings.

A well-diversified portfolio is more than just equities though.

Despite the U.S. bond market being down 4.7% this quarter, fixed income still plays a role by providing income and short-term liquidity in the portfolio. There has also been talk over the past decade about the increased correlation between asset classes. Alternative assets such as private lending or private equity may be an option to provide returns uncorrelated with the broader market.

Lastly, when building a portfolio, it’s easy to forget things as mundane as fees. Even if you manage your own portfolio and don’t work with a financial advisor, fees still apply.

A self-managed portfolio does not mean there are no fees associated with it as mutual funds and ETFs do have expense ratios (management fees).

Forecast these outputs in your plan to gain a better sense of portfolio cost and performance. 

Planning

Whether just getting started, nearing retirement, or already retired, everyone’s financial plan is a little different. Financial plans are not a one-size-fits-all. For retirement income planning, it’s important to assess whether your savings supports your goals and the desired distribution rate.

If you’re still working and in the wealth accumulation phase, then your savings rate and investment return expectations will give you an idea of what income you can expect in retirement.

If you don’t like what you see, don’t fool yourself by playing around with investment return expectations, and instead, speak with a certified financial planner.

Roth conversions

There may also be opportunities for tax loss harvesting and Roth conversions in a market downturn. Tax loss harvesting is a strategy to reduce capital gains taxes by selling some investments at a loss to offset stocks that were sold at a profit.

Roth conversions allow you to convert funds from an IRA (tax-deferred account) to a Roth (tax-free). The catch being that you must pay income taxes on the amount being converted from the IRA to the Roth. But this may be worth it since you can now pack more shares into the Roth conversion, for the same dollar amount, than you could in 2021 due to the market decline.

No one can predict what the markets have in store for us next. American investors have had a great decade, but it’s natural to have quarters of negative returns. It is also natural to be uncomfortable with the uncertainty a market downturn can bring to your financial plan.

If you have any concerns about your financial plan, don’t hesitate to reach out to your advisor; that’s why they’re there. And if you don’t have a financial advisor, one of the nice things about financial planning, compared to the medical profession, is that most checkups are free.

Nicholas Haberling is a partnership advisor at Community First Bank & HFG Trust in Kennewick.