Ep # 65: Best Ideas for Being Opportunistic in 2022

Benjamin Haas |
  • Recent market facts - 1:32
  • Making lemonade out of lemons - 5:14
  • Things to consider if you have excess cash - 7:53
  • Bear markets - 10:15
  • Roth conversions - 11:47
  • Rebalancing your portfolio - 13:58



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Full Transcript:

Benjamin Haas  00:03

Hi everyone and welcome to A/B Conversations, where we will help you CFP your way out of it. A podcast where you get into the minds of a couple Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most to you. A healthier financial life starts...now! Hi Adam.


Adam Werner  00:30

Hi Ben, you sound like the narwhal from Elf. Hey Buddy.


Benjamin Haas  00:38

I was thinking more like Eeyore. Hi Adam. Don't want to be a bother. I don't know, doesn't this whole start to the year kind of feels like it's just not churning the right way yet. We've got a market that's like starting to be a little wonky. We lost some legends, Betty White, Bob Saget, and Meatloaf. And it's cold.


Adam Werner  01:08

None of those were positive things that you've rattled off so far and I think I saw; I don't know if it was an article or just the headline. I think it was Monday, the 24th, I think of January is the saddest day of the year. So I guess good news is we're on the other side of that. Being an optimist. 


Benjamin Haas  01:32

Love it and I think that's the theme of the podcast today, ironically enough. If we're not going to go through some market volatility, let's actually flip the mindset here for our listeners into how can we be opportunistic, if we are going to be presented with a market that is flat to down? 


Adam Werner  01:51

Yeah, I certainly will share I am guilty of this and I certainly can see clients falling into this trap, too. It's the recency bias. 2021 as a calendar year for the S&P 500 was not a very volatile year. I think we just barely touched a 5% pullback and I don't even know if it ended the day down that 5% or that was just intraday movement. So historically, as in the measure of volatility, 2021 was a pretty calm year in the markets. By the way, it was also up 20. The S&P was up almost 27-28% for the year. 


Benjamin Haas  02:35

And as a point of comparison, after the first quarter of 2020. COVID hits, market drops.


Adam Werner  02:42

Oh, yeah. 


Benjamin Haas  02:43

From April 1 to election day, we had 10 x 5% corrections. So through the recovery. That felt so great. We had 10 times more volatility than we had last year. So recency bias, indeed, we just didn't have any last year. So this start to the year, a little pullback, little - I mean, as of today, we're talking 6, 7% year to date. That is not abnormal. It just feels abnormal because we didn't have any last year. 


Adam Werner  03:14

Yeah, and I think we certainly see a lot of the headlines, the prognosticators are throwing out predictions of what they think is going to happen. We, I often like to joke, I forget where it came up but there was these, again, quote, unquote, financial experts that are making these predictions. And the joke is, this Economist has predicted 19 of the last two recessions. It's more entertainment at times than it is actual science and it again, kind of feels like that. It's very easy to make those predictions if you're not ever held to any standard. Another side I think of what we hear from people is well, we're due for a correction. We're due for a pullback and where the statistics and the historical averages are averages over time for a reason. Time by itself, that's not necessarily a thing. The market doesn't care how long it's been going up or how long it's been going down. That's not necessarily a variable or a factor that comes into play. So a lot of it is just circumstantial and again, here we are to start the year off of what was a historically great year, last year, without a whole lot of volatility. Now, we're starting this year with a lot of the opposite and I often like to say that pendulum when it comes to the stock market, that pendulum swings both ways and it often is overreacting to both sides. So maybe last year was a little rosier than it should have been and maybe the start this year is probably more negative than it should be. At the end of the day, it will, we think, it should work itself out and if we still have a positive outlook for this year, but I think it's going to take a little bit more discipline to not change your strategy if it's not broken in the first place.


Benjamin Haas  05:14

Yeah, how do we turn some of these lemons into lemonade? I think first and foremost, one of the things that we often see and it's especially true after the last few years of stock market returns, are within a non-retirement account. So we're not talking 401k or IRAs or things like that, but a non-retirement investment account where you pay taxes on what you've gained. There's an opportunity that up to this point, if you've been investing for the last few years, you probably have some pretty large sized gains that you have not necessarily paid taxes on yet until you go to sell it and the fact that the market is maybe pulling back, you may still have a gain, it just may not be as large. So it may be an opportunity if you're holding a fund or an ETF or a stock that you're maybe not necessarily in love with anymore but you've held it because of the potential tax impacts. It may be an opportunity to pivot without too big of a tax impact and move into something that you like now better. Moving forward, it just gives you that flexibility and opportunity to make that decision. I love what you said there about just keeping perspective. That's what I took of what you said because if you do think about where we started 2021 to where we are today. The S&P's still up close to 20%. 18, 19, 20%. Which, if it stays that way, that's still much greater annualized rate of return then we often would project in a financial plan. So again, I don't want to lose perspective on how far we've come but let's flip right into, let's say we keep that perspective and we're okay with that perspective. But it does look like this turns out to be a down year. How can we be opportunistic about that? What's the first thing that comes to your mind? Yeah and it may be dependent on when you started something or when that initial investment was but yeah, oftentimes, by the end of the year, we are to comb through client accounts and see if there are losses. If we are truly diversified and not everything goes up or down in the same way. They don't. Some things have inverse relationships. It's our job, it's prudent of us every year to see if there's a loss or two that we can take to help maybe offset some taxes of gains. That's just being tax efficient. So yeah, if we're going to have a down year, let's be opportunistic, about maybe offsetting some prior gains or taking some losses on a tax return. 


Adam Werner  07:53

Yeah, so I was making a face on my side because I know we just talked about this and then I completely went out of order so I'll throw it back to you. The biggest, lowest hanging fruit when it comes to the market dipping is if you are sitting on cash and have not necessarily bought something, now maybe an okay time, if again, as long as we feel the fundamentals are still in an OK spot, then maybe it's a decent time to put some cash to work when you get a little bit of what we could consider a potential sale.


Benjamin Haas  08:26

Yeah, and this is where the human side of investing sometimes takes over what we're suggesting here. That people would, they're still 2.5 times more focused on the pain of losses than they are about the feel good of potential gains. So, it's that old adage that it does make sense to think like a consumer. If I really like to buy this product and all of a sudden, it's 10% on sale. I want to buy even more, right? You don't want to pay more for something that you want. We don't innately think that way with investments but we probably should. If the markets down and you've got cash to invest. I realized the angst of that may be, what why am I going to try to catch a falling sword? Why am I putting money into a falling market? But you really do have to flip your psychology a little bit and go, the stuff’s on sale. I'm a long-term investor so buying it a little bit cheaper, is going to benefit me in the long run. So yeah, low hanging fruit. If you've got cash that you want to invest and the markets down, it's probably a good time to do it. Don't try to time the bottom, get it to work. 


Adam Werner  09:34

Yeah, and I think the key of what you said there is looking through the lens of being a long-term investor. Not having to necessarily maximize and you said it right, pick the bottom, try to squeeze every last little ounce of this orange. It can be the markets down, the S&P is down 6-7% right now, that could certainly go to 10. That could go to 12. It could go even deeper. We don't know but making that decision, down 7% you don't know if it's going to go to 15. So it's an okay thought process knowing that where we were to where we are, you're still getting it less than what you could two weeks ago, three weeks ago.


Benjamin Haas  10:15

So I'll stay there for a minute. In thinking about recency bias, right, which is just what you said, when we were thinking about this volatility. Your mind just focuses on the thing that is easiest for it to remember. Most recent but if we look, since 2018, the fourth quarter of 2018, we've had two market corrections. Not corrections - Bear markets. For 10% correction, bear market 20%. We got very close to 20% in the fourth quarter of 2018 and a very strong year 2019. We know COVID, hit straight down. My point is, if you've been a long-term investor, you have very recently within the last, essentially three and a half years, experienced two of these major market jolts. You not only survived it but you're better because of it. Even off 6% today from the beginning of the year, that's like 6% from the all-time high and didn't you tell me there was a stat at the end of the year the market hit like 70 all-time highs last year? Something like that. 


Adam Werner  11:20



Benjamin Haas  11:21

So like, just recognize when you think about the psychology of putting money to work and you think about it being in a down market, remember that you just went through this not too long ago and had you been able to put money to work, not knowing when the market was going to go up, you now have the evidence that it always does. So be a long-term investor. Put cash to work if you have it. That's one very easy way to be opportunistic this year. 


Adam Werner  11:47

Yes. So in a similar vein, it is for anybody who was potentially thinking about converting to a Roth IRA, thinking of a retirement account, 401k, IRA, something like that, that you could convert to a Roth. So I guess, let's take a step back. I don't know, have we done a podcast specifically on Roth conversions? I know we've talked about it in different formats. I'm trying to think if I can just say, Well, hey, go listen to podcast blank. 


Benjamin Haas  12:21

Maybe, maybe not and Devon would fact check us on that.  


Adam Werner  12:27

So just a quick lay the groundwork by converting to a Roth IRA, you're paying the taxes today out of your retirement account, your pre-tax retirement account, you're paying the taxes today, so that theoretically, once it's in the Roth IRA, you will no longer pay any taxes on that or the growth ever again, into the future when you take withdrawals. So it's paying 


Benjamin Haas  12:49

For your heirs.


Adam Werner  12:51

Oh, yes, great point. You often like to use the kind of the analogy of it's paying the taxes on the seed and not the harvest. 


Benjamin Haas  12:59

Well, you know me. Good Pennsylvania Dutch kid. 


Adam Werner  13:03

So the idea there, again, being if the market is, again, I'll use numbers. But if you had, if you were looking to convert $50,000 of your IRA to a Roth IRA, and now that $50,000, of value turned into $40,000 in value because the market is down, you can convert at that lower dollar amount and then that's where the taxes get based on the actual conversion. Now in that scenario, you're starting with $40,000, in your Roth IRA, at some point, we know historically, the market is going to rebound. So that $40,000 grows back to the $50,000 and beyond, all of that now moving forward, again, falls into that tax free component within the Roth IRA. So it's a great way to lessen some of that tax bite, if a Roth conversion fits into your plan. 


Benjamin Haas  13:58

Perfectly said, I don't need to say anything more on that topic. What if you don't have a non-retirement account? What if you don't have a Roth IRA? And what if you don't have cash to invest? There still may be opportunity for you. It's just always something that we will talk about at major points of inflection. Is this a time to potentially rebalance the portfolio? So this was the last thing I wanted to kind of talk about and that's just the old idea that if those stocks will say, in the when we say the market, we're usually talking about this S&P 500. If that value is down, then maybe the percentage of your portfolio that was stocks now feels like less. Maybe it's not cash going in but you rebalance back to the target amount would mean maybe buying some more stocks within your portfolio and group getting rid of something that is a little more conservative. So usually if the market moves far enough and our models move far enough, that's always going to be a consideration for us. Yeah, I liken that to being opportunistic because that is a way of you putting more money back into stocks that’s hopefully a lower price.


Adam Werner  15:14

Yeah, I think the key component there is to know what your original target was and then be sure to compare that to now. How did the markets movements actually impact my allocation because it is interesting to see sometimes when we do that analysis, knowing that stocks were up 20 some percent last year and bonds were actually negative a little bit or at least flat, to see that sometimes, again not all returns are created equal. So even though the S&P 500 was up 27%, not every stock or type of stock, small, large, in between moves at the same clip. So even though the headlines and the indexes may move doesn't necessarily mean that your funds are moving in that same ratio. So again, you just want to be able to compare your baseline to where it's at now and then make that decision on. Yeah, is now an opportunistic time to maybe shift from some bonds to stocks and maybe vice versa, depending on your approach to risk.


Benjamin Haas  16:19

So I think these are all good things to keep in mind this year not knowing where the market is going to go. But I hope the takeaway here is that even when you do have these negative years, there still are things you can do to try to better yourself in that environment. That's where the word opportunistic needs to come in. Think of it as a positive if you are able to take some of these steps. 


Adam Werner  16:42

Yeah, and I guess it's all of those things are with the long game in mind, right? These are not get rich, quick. These are not short-term schemes, right? They truly are keeping the main thing, the main thing over time, and those little incremental shifts that you can do in a time of opportunity, potentially, negative volatility and turning that into an opportunity can pay dividends over a longer period of time. 


Benjamin Haas  17:11

Yes, and let's all hope that 2022 is not 2020-two. Yeah. See what I did there? Hey, did you also know that February 22, of 2022 is a Tuesday? Oh, so we can literally call it Two's day. 


Adam Werner  17:31

I only know that because somebody and one of my kids I think pointed that out. 2-2-22 and it's on a Tuesday. 


Benjamin Haas  17:41

I can't wait. 


Adam Werner  17:42

We'll get shirts made. 


Benjamin Haas  17:46

Have a great rest of the day. Thank you. Thank you for your optimism today, Adam for thinking opportunistically.


Adam Werner  17:52

The way you said that makes me sound like I'm not optimistic any other way. I appreciate your appreciation. Till next time.


Benjamin Haas  18:04

Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only and are not intended to provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you. Consult with your attorney, your accountant and financial advisor or tax advisor prior to making any decisions or investing. Thanks for listening!


1.   www.riskalyze.com

2.  Source: Bloomberg, 4/29/1942 - 12/31/2021. Past performance is no guarantee of future results. For illustrative purposes only and not indicative of any actual investment. Investors cannot invest directly in an index.


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