FORTUNE: Understanding How The Wealthy Are Managing Their Money Through the Current Stock Market Downturn
This article was written by lucy brewster and was originally posted in FORTUNE on July 14, 2022. Here’s an excerpt, and you can read the full article here (HEADS UP: THERE IS A paywall).
The ultrawealthy are different from the average investor: They have access to financial advising strategies that limit their losses—and even help them take advantage of opportunities that come with a bear market. “Most of my clients see this period as an opportunity,” explained Georgia Lee Hussey, the CEO of the progressive financial advising firm Modernist Financial.
From investing in private credit to tax loss harvesting to converting to a more sustainable stock portfolio, the top 1% is not complacent during the market meltdown.
Here’s what they’re doing—and how you can benefit from what they already know:
Stay the Course
Seasoned investors know that the stock market is cyclical. Hussey explained that her clients remind themselves that stock market lows are historically normal. Explained Hussey:
“[Historical perspective] is one of the biggest differences that I see between earlier investors and investors who have a fair amount of experience. For example, I have a client who is 80, and the current inflation and rising interest rate market is not bothering him at all,” she explained. “The first thing that my high-net-worth clients do is put the noise within context, and usually just ignore it.”
Focus on What’s “On Sale”
For investors looking to accumulate stock, now is the time. “Everything is on sale,” Hussey said.
Shift from Traditional to Sustainable Investing
Hussey says many clients are using the downturn to shift from traditional to environmental, social, and governance (ESG) investments. ESG investing encompasses companies that are considered environmentally sustainable and socially responsible, and that operate ethically. For many of Hussey's clients, while sustainability is a priority, capital gains taxes would normally be prohibitively high to transition an entire portfolio of stocks to companies that have favorable ESG ratings. A bear market is the best time to transition your portfolio, because when valuations are depressed, investors can make strategic transitions with their portfolios at a lower capital gains tax rate.
“We have been waiting for the market to go down,” she said. “If the value of everything is down 20% and I need to convert the stock portions to ESG investments, it is cheaper for me to do it now.”
For any investor interested in investing in sustainable stocks, a company's ESG rating can be found on research firms’ lists, such as the S&P Global ESG Risk Atlas.
gift equities
For investors who plan to give stock irrevocably to a trust, a bear market allows them to give higher amounts of money at a lower tax rate. High-net-worth individuals may be thinking about giving in the context of the lifetime gift tax exemption that is set to last until 2025.
Take Advantage of a Roth IRA
Another popular move right now among high-net-worth individuals? Transitioning a traditional IRA account to a Roth IRA account. A Roth IRA account benefits investors since the money is taxed when it is put in as opposed to when distributions are taken in retirement. Unlike a traditional IRA, a Roth IRA does not have to be withdrawn (at 72.5 years old), so the money can continue to grow tax-free and even be passed down to another generation tax-free. Converting traditional accounts into Roths while the market is down means you're paying a lower tax rate in comparison to the eventual growth of the account.
Hussey explained that her clients are also taking advantage of the bear market to convert to a Roth IRA. “If your traditional IRA had $400,000 in it, and [when the market goes down] you now have $300,000, if you are converting a third of it to the Roth, that $100,000 you move are the same assets.” Hussey explained that you’ve done the conversion “on sale” because the amount of tax being paid is lower, yet the same assets are now converted to a Roth and the equities are positioned to grow when the market recovers.
However, transitioning from a traditional IRA to a Roth can result in a large tax bill, so it is important to consult with a tax adviser about your individual situation.
Pause on real estate purchases
Hussey explained that she has told her clients to put off buying and renovating real estate for the time being. “I've been telling people not to buy into the real estate market and not to do remodels on their houses. Because that market feels insane,” she said. “You're stuck with that house once you own that house.”
To Hussey, it is worth it for her clients to wait to buy until the market cools down, even if that means paying a higher mortgage rate on a smaller loan value. "I've been telling people to just wait; even if they have to pay a slightly higher interest rate on their mortgage, they're still in a position to buy a house (at a more reasonable price)," she explained.
Consider Bonds
Rising interest rates also make buying individual bond issues more advantageous. Many of her high-net-worth clients, Hussey explained, are converting bond funds to individual bond ladders: portfolios made up of bonds that mature in staggered dates. The benefits of a bond ladder are that it can help create predictable income and mitigate risk of shifting interest rates. To build a bond latter, people invest in a number of different bonds with the same value that mature at regular intervals, beginning at different times.
While Hussey noted that bond ladders are not necessarily accessible to everyone, regular investors can still benefit from holding bonds right now. “Let’s say you own a Vanguard short duration bond fund, the income they're going to receive on that bond fund is going to go up over time," Hussey explained.
Get Liquid
Crucially, every adviser I spoke to stressed that it is vital for investors to have access to liquidity so they don’t have to sell depressed assets to pay bills. Hussey explained that her clients have been building their cash positions for the past few years. “A lot of our clients are business owners. So we’ve been doing things like building Line of Credit opportunities for them,” she explained.
Hussey noted that for those that do not fall into the high-net-worth category, creating access to liquidity could look like asking for credit card increases. She explained that in 2020 when the market went down, she requested increases from her credit card companies, just to ensure access to cash. However, this strategy only makes sense if you’re sure you can pay off the balances to avoid accumulating credit card debt.
In the end, perhaps the best thing you can learn from the ultrawealthy is to set your expectations realistically for the next chapter.