Below is a reprint of a letter we sent to our clients earlier today, June 11, 2022. We hope it’s helpful for you, too!

Hello to our wonderful clients!

Given the continued volatility and declines in the stock, bond, and crypto markets, we wanted to reach out with an update on what’s going on and provide a few timely opportunities for you to consider - silver linings of a difficult period in the market. If some of these timely opportunities apply to you, we’ve likely already communicated one-on-one about them or they’re on our agenda for our next meeting, but we’re sharing them here as well just in case.

What’s causing the decline in the markets this year? 

In short, inflation, interest rate increases, the war in Ukraine, higher oil prices, supply chain issues, and lower corporate earnings have all put downward pressure on stock prices. These factors, in addition to the collapse of a stable coin called Terra, have contributed to declines in crypto as well. 

As for bonds, interest rate increases have led to bond prices dropping. That’s because when existing bonds carry a lower interest and new bonds are issued with higher interest rates (because interest rates are rising), existing bonds become less attractive compared to newly issued bonds. That leads to the price of existing bonds going down. (No one wants to buy an old 3% bond when they can get a new bond paying 5%.)

How have the markets performed year to date (as of June 11, 2022)?

• The S&P 500 is down 17.6%

• The NASDAQ (which is comprised largely of tech stocks) is down 27.5%

• Bonds are down 9.06% (with short term bonds down less, and long duration bonds down more)

• Bitcoin is down 39.1%

• Ethereum is down 58.8%

Are we in a bear market?

A bear market is a drop in stock prices of 20%, so we’re not there yet, but could very well be soon. 

Keep in mind that average bear markets since the 1950s have lasted just over a year with a price decline of 36%, but average bull markets have lasted just shy of six years with returns of 192%. These are just averages, but they help to paint the picture of why staying invested for the long term tends to benefit investors over time. With a crystal ball, we could sell at the peak before the bear market, and buy back in at the low point, but it’s impossible to time when those peaks and low points will happen. 

Are we in a recession?

Historically, a recession was defined as two consecutive quarters of declining GDP, but the National Bureau of Economic Research has expanded the definition to be “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” So are we in a recession? We won’t know for a few months, but based on data from Q1 of this year, it’s pretty likely. 

So what does that mean for your portfolio?

Your portfolio is almost certainly down. But through our work together, whether we manage your assets directly or we’ve made recommendations for how to invest in your accounts elsewhere, you should be in a well-diversified low cost portfolio appropriate for your time horizon and risk tolerance, and that’s where we recommend you stay. That is, unless your goals have changed. 

What opportunities are there when the market is down?

• Invest excess cash

• Consider Series I bonds

• Harvest tax losses in non-qualified accounts

• Harvest crypto losses

Invest excess cash: 

If you have cash sitting on the sidelines that is earmarked for a long term goal (typically retirement or college for your kiddos), consider investing those funds - either all at once or over the next several months. Let’s chat if this applies to you.

Series I Savings Bonds:

Series I savings bonds purchased through October 2022 have an initial annualized interest rate of 9.62%! This rate applies for the first six months you own the bond, and resets every six months. There is an initial lockup period of 12 months after which you can redeem the bond at par value at any time. The interest rate could certainly go down (or up) over time, but will never be below zero. If inflation is persistent, the rate will remain attractive as it is linked to the Consumer Price Index. You can purchase up to $10,000 of Series I bonds per person, per year, directly from the US Treasury. Series I bonds could be a great option if you have cash set aside for a goal that’s between one and three years away, or for a portion of your Emergency Fund that you are confident you won't need for the next 12 months. They could also be a great option for a portion of the bond component of a non-qualified portfolio. More info here and here.

Harvest Losses in Non-Qualified Accounts:

You may have holdings in your non-qualified accounts (not IRAs, Roth IRAs, 401(k)s or 529s - just plain old brokerage accounts) that are now worth less than what you paid for them. Although investment losses are a bummer, there is a silver lining here. If you sell the holdings that have dropped and reinvest in different stocks, mutual funds or ETFs, you can deduct up to $3,000 of realized losses on your taxes each year. Losses not used on your 2022 taxes can be carried forward to future years. For example, if you’re in the 35% federal bracket and the 9.3% CA state bracket, you could save about $1,300 on your taxes this year by realizing $3,000 of losses. Realized losses can also be used to offset capital gains, which can be helpful when trying to rebalance a portfolio that you’ve held for quite some time. 

If you’re looking to harvest losses in accounts that we don’t directly manage, reach out for a chat so that we can help you do it efficiently and avoid the wash sale rule. 

If we manage your non-qualified accounts and there have been opportunities to harvest tax losses, we’ve already taken care of it for you and will continue to do so. 

Harvest Crypto Losses:

If you have money in crypto, you may have holdings that are now worth less than what you paid for them. If you sell your holdings that have dropped and then reinvest either in the same holding or different holdings, you can deduct up to $3,000 of losses on your taxes, or use those losses to offset gains elsewhere. 

If you’re looking to harvest crypto losses, you don’t have to worry about the wash sale rule, which means that you can repurchase the same holding right away and still use the loss on your taxes. However, the US government is contemplating a change to this rule. Reach out so that we can help you determine the right way to go. 

Apologies for the length of this update, but there was quite a bit to share. I hope this is helpful, and please know that we’re here to help and to answer any questions you may have.

Best,

Natalie and Cyndi

Disclosure: Offers for personal consultation contained in this letter are intended for current clients only. If you are interested in chatting with us about our services, please add your name to our waitlist. This information is for educational purposes only and is not a recommendation to buy or sell any securities. This information should not be construed as professional advice of any kind and is not a substitute for one-on-one professional advice. Okay, got that out of the way. :)