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The Smart Take:
If the recent market drop has you feeling uneasy, you’re not alone — but sharp swings are regularities you need to navigate. The S&P 500 and Nasdaq have both taken hits this year, but history shows that intra-year declines like these are common and something long-term investors have weathered time and again.
In this episode, Tyler Emrick, CFA®, CFP®, breaks down recent market moves, highlights where diversification is working, and shares how tax strategies and disciplined rebalancing can help keep your investment strategy running smoothing and financial plan on track.
Here’s some of what we discuss in this episode:
📉 Market pullbacks are normal—even healthy
📊 Diversification is your protection in volatile times
🔁 Rebalancing can improve long-term returns
💸 Tax-loss harvesting can create future tax benefits
🧠 Discipline beats emotion when markets get rocky
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The Hosts:
Kevin Kroskey, CFP®, MBA – About – Contact
Tyler Emrick, CFA®, CFP® – About – Contact
Episode Transcript:
Tyler Emrick:
The markets have been on a wild ride lately, and if you’re feeling uneasy, you’re not alone. Today, we’ll help you put these market moves in perspective, show you why this isn’t anything new, and help explain how disciplined planning can actually turn volatility into an opportunity. All that and more coming up today on Retire Smarter.
Walter Storholt:
Hey, welcome to another edition of Retire Smarter. Walter Storholt here alongside Tyler Emrick today. We’ve got a great episode on the way that will hopefully maybe calm a little nerve. I like the title of this one today, Tyler, Don’t Panic, because I feel like there’s been a little bit of that lately, just a slight bit, so this’ll be good.
If you’re new to the show, by the way, Tyler is a Chartered Financial Analyst. He’s also a Certified Financial Planner and Wealth Advisor at True Wealth Design based out of northeast Ohio but serving clients all across the country. You can find us online at truewealthdesign.com. For more episodes and information, be sure to check out the blog. It’s got lots of exclusive content and great information there as well. Tyler, how’s it going, before we dive into the don’t panic part of this?
Tyler Emrick:
Oh, hanging in there. Doing pretty well. I think we’re in the throes of March Madness basketball.
Walter Storholt:
That’s right.
Tyler Emrick:
I know we were talking a little bit beforehand, there hadn’t been too many upsets, but no shortage of good games to watch on TV.
Walter Storholt:
Yeah, my Tar Heels bowed out early, unfortunately.
Tyler Emrick:
Bracket’s not doing too well.
Walter Storholt:
But that’s just part of the deal. Wasn’t our year for sure.
Tyler Emrick:
Yeah. What’s that team again?
Walter Storholt:
The Tar Heels, Carolina?
Tyler Emrick:
Oh, yeah, Carolina. Okay, fair enough.
Walter Storholt:
I’m pretty much going to have to be an anybody but Duke fan at this point, so I don’t care who wins at this point, just don’t let it be Duke is what most of us Carolina fans switch to once this happens.
Tyler Emrick:
Yeah, I can understand the rivalry. I’m a big Buckeye State fan, so a similar concept with Michigan.
Walter Storholt:
Yeah, like you do not want to see Michigan keep going through, right?
Tyler Emrick:
That’s right. Yeah. Buckeyes didn’t make the tourney this year, so in basketball, so we did pretty good in football if you haven’t heard, but basketball, they kind of missed the boat here. So I’m wide open just hoping my bracket does well, which, you know, didn’t, so we’ll see.
Walter Storholt:
Yeah. I’m not checking mine. Last I did, it was pretty far at the bottom. Maybe I’ve rallied and come back, but I’m going to give it a few more days before I peek in there. It’s kind of like looking at the stock market. Look at this segue, by the way. Got to pat myself on the back. Boy, when there’s a lot of volatility, you’re either one of two people, right? You’re constantly checking it and stressing over that falling number, or maybe you’re a stick-your-head-in-the-sand person, like, “I’m not going to log into my accounts and look at how bad the last few days have been.”
Tyler Emrick:
Right. Yeah. Well, what triggered even the podcast today is actually, I got an email from one of the individuals I work with and they’re like, “Hey, we noticed there was some trading in the account here recently. What’s going on?” And you know, “Give me a little bit of an update here.” So I was like, “Oh, huh, okay. No, that makes sense.” And it got me thinking about, well, we have certainly had a bit of a pullback in the market. Let’s take a little bit of time to just put it into perspective, talk about some of the recent market volatility. Maybe we have … certainly have some suggestions on what you should be doing when the market has pullbacks like we’ve seen in the last month. And then just hopefully set the tone and give individuals and families a bit of an idea on what they should be thinking about and what they should be doing when they hear all these headlines around the stock market and performance and pullbacks.
Walter Storholt:
Well, sure. I think even hearing you say, like, “Oh, I noticed some trading was happening in my account,” and immediately I’m thinking, “Oh, well, but if the market was down, like, don’t sell when it’s down.” So I’m sure that maybe causes confusion too, right?
Tyler Emrick:
Sure, it is. Absolutely. Well, and I think a lot of these phrases like buy and hold tragedies and so on and so forth are ingrained, and certainly it can be very, very good advice. But as we’ll kind of get into here today on the podcast, that trading is done with a purpose, and you know, there’s very specific reasons as to why we want to do it, and I think it would be good for us to kind of share that to the listeners here today.
But as we kind of think about, well, what has transpired over the last month, well, we kind of look at just a few indexes here, and the S&P 500’s probably the most widely quoted index. If you’re listening to the news or reading articles or so on and so forth, a lot of times they’re going to latch onto that S&P 500, which is just 500 US-based companies. That’s down about 8% in the last month. You look at other parts of the market or other indexes like maybe the NASDAQ-100, which is, again, just 100 companies, non-financial companies, typically they weight a little bit more towards tech companies, that was down almost 11% in the last month. So, you start to see drops like that over a 30-day period, certainly I think it can arise some questions.
I think it’s good to take a step back when that happens and really just figure out and say, “Well, in the grand scheme of things, how big are these pullbacks? And what does the stock market volatility, how does it kind of rear its head?” So I’m curious … Well, some of the first stats that I have here to share to set that perspective a little bit talks a little bit about S&P 500 declines in a given year, how much the S&P 500 declines average in a given year. So, this doesn’t necessarily mean that, hey, how much does the S&P 500 lose in a given year or make in a given year, it’s really just a drop within that year. We call it an intra-year decline. Any guess on what the average is? And you can cheat a little bit if you have some notes in front of you.
Walter Storholt:
Yeah, I have your notes in front of me. I was just going to say, I thought it was interesting, a 1% decline is 100%. It makes sense, right? Like, okay, that’s going to happen, so let’s get over it.
Tyler Emrick:
Yes, yup. Hey, yup, the S&P 500-
Walter Storholt:
And it puts the rest of these into some perspective like, oh, this is going to happen. It’s okay.
Tyler Emrick:
It does. It does. Well, and I think the number that the S&P 500 drops on average per year is kind of staggering and maybe even a little high to some listeners. It’s a little over 14%, right? So, what that says is-
Walter Storholt:
Oh, I would say that’s a little staggering to think about.
Tyler Emrick:
In a given year, the S&P 500 is, at some point in that year, going to drop by roughly 14% on average, and-
Walter Storholt:
And that means from wherever its high was, it’s going to have from a high to a low, 14 … Not necessarily the start of the year going down the 14%, but there could be a rally and then a drop, and that’s your logging your drop.
Tyler Emrick:
Correct, correct. You got it. It could be at any given point throughout that year. And of course, that might seem like a lot, but you say that in the backdrop of, well, hey, if we go back in the last 45 years, almost 75% of the time, annual returns were positive. Okay, well, that 14% drop doesn’t necessarily mean that that’s how it’s going to end up for the year. That’s just the [inaudible 00:06:43]
Walter Storholt:
It’s a really good lesson in volatility versus returns.
Tyler Emrick:
It is. It is. Well, and then to your point, that nice colorful chart that you’re probably taking a look at here, where it kind of, I think, is another way to look at it is that, well, how many years on average do we experience big drops? So, the drop that we just had, what we’d say it was? About 8% or so in the last 30 days? A drop like that average happens about every year in the S&P 500, so that is not uncommon, really, at all for us to see the pullback that we’ve seen here recently.
You start expanding out that number a little bit and looking at bigger drops, I think it helps set some perspective as well. So, that chart that you’re looking at, a 15% drop happens about every two years or so. A 25% drop happens about every five years. So, these numbers are here just to kind of reiterate the fact that hey, stocks can be pretty volatile, and in most years, that volatility is going to rear its head at some point throughout the year. Doesn’t necessarily mean that it’s going to be a bad year from a performance standpoint. It just means that, hey, this is what we mean when we say, “Hey, the stock market is going to have some ups and downs at any given point in time, and certainly you’re going to be taking on some risk when you invest in the stock market.”
Walter Storholt:
It’d be pretty interesting to see each of those drop metrics, then the percentage of years in those categories that ended up with a positive return at the end of the year.
Tyler Emrick:
At the end of the year.
Walter Storholt:
I’m not asking you to go do that research.
Tyler Emrick:
Yeah, well, a quick math? We’ve got the calculator here. Yeah, I don’t know that per se, but I can tell you what I mean. The S&P 500 generally is going to average about a 10% return per year, going back over time. So, you get paid for taking on that risk.
Walter Storholt:
And you said that 34 out of 45 years had positive annual returns.
Tyler Emrick:
Mm-hmm. It did, yep. Going back to, I think, 1980 is the stats that we looked at from there. Yeah, 34 out of 45 years, positive returns in the S&P 500, so that’s why the old adage is stay invested and ride out some of these ups and downswings. But as we kind of look at the recent volatility that we’ve had, I think we can dissect it even a little bit further, and I think it’ll talk to us a little bit about the importance of diversification. I mean, because you think about just in general, what helps individuals and families get through this volatility, and I think diversification of your portfolio is really going to be your guiding star, and certainly help you when we experience an 8%, 10% drop in a given month or a 30-day time period.
Now you look at the performance this year in stocks, and the pain has been in really US large cap and US small cap growth stocks. Now, growth is just a term that we use to kind of identify and quantify certain stocks that are companies that are really expected to grow faster than average, even if they look expensive. And the trade-off there is that these types of stocks have higher potential upside at higher risk, and certainly higher volatility. So if we look at this year and say, “Well, large cap or big companies, growth-oriented, are down about 8%, and small cap, small companies that are growth-oriented, are down about 8%.” And you kind of categorize that against other parts of the US stock market, well, other parts of the US stock market that were maybe better priced or more fairly priced have done well or down less, right? Large cap value type investors are actually positive for the year.
So, we’ve seen a pullback, and that pullback has been really hit hard into a couple specific parts of the US stock market, which goes back to that whole adage of, are you diversified? If you look at your portfolio over the first three months of the year here and you’re seeing double-digit returns down in your stocks, well, if you dissect that a little bit more and say, “Well, what am I overweight and where do I have my exposures at?” You’re probably going to find that, hey, you might be overweight toward those big large tech companies or somewhere in the small growth space that has seen the most pain. And then you got to really ask yourself, and take a step back and, “Well, hey, do we want to diversify, and will we get some value during volatile times like this to kind of smooth out the ride, not having all our eggs in one basket per se?”
Walter Storholt:
Yeah, makes a lot of sense. These kinds of times are good gut checks too for your diversification, right? This is when if you’re expecting, okay, the market as a whole is down 7% or whatever, I’m down 30, hmm.
Tyler Emrick:
What’s going on here? Yes.
Walter Storholt:
A clue, I’m out of whack maybe a little bit, unless you know that’s the purpose of your account or something, but …
Tyler Emrick:
Is that right? Well, and that can be like, hey, do you have too much money in one particular name or one particular stock? Do you have it all in large US growth-oriented companies? So on and so forth. I think what’s fascinating too is a lot of individuals, and we’ve done some podcasts on this in the past, where a lot of individuals will invest in an S&P 500 index fund and say, “Hey, that’s as diversified as what I need to be.” But you kind of look at the S&P 500 performance so far here, year-to-date, I think it’s down just under, like around 4% or so, 3.7% here, at least at the numbers that we’re looking at. And you kind of think about that S&P 500 and say, “Well, that’s 500 companies, US-based,” but that is a market cap-weighted index. So, what that means is that the bigger companies are going to drive more of that performance.
I’m sure, Walter, you’ve ran across the Mag 7 at some point in your readings, these seven big companies that have driven a lot of the US performance here in the last really handful of years. These are like your Microsofts, Apple, Google, Amazon, NVIDIA, Tesla, companies like that, the big seven, have really driven a substantial part of the S&P 500 performance in ’23 and ’24. You kind of pull those seven companies out of the S&P 500 and look at the S&P 500 performance, or the other 493 stocks, the S&P 500 is actually up year-to-date a little over a half a percent. So, the pain has been really in some of those big tech names that have done pretty well over the last couple of years.
Walter Storholt:
That’s interesting. It’s also interesting to see the reactions to things like this. I googled Mag 7 as you were talking about it, and it’s funny, the first news result that comes back is, “The Mag 7 are dead money. Here’s what to invest in instead.”
Tyler Emrick:
Hey, don’t get caught up in those headlines, Walt. You want to be like me, right? Hey, I’m always coming up with podcast titles on these crazy headlines.
Walter Storholt:
That’s right. I’m going to send this one over to you. It might catch your eye, right? But talk about, I mean, I don’t even have to read the article to feel like that’s an overreaction, right?
Tyler Emrick:
Sure, yeah. And they’re always trying to catch you to try to get in and look and read and get those clicks, but to the point-
Walter Storholt:
That was on Barron’s.
Tyler Emrick:
Was it?
Walter Storholt:
I would think people would see that name and think, “Pretty reputable.”
Tyler Emrick:
Very reputable, mm-hmm, yep, or certainly a more well-known name in the industry, for sure, but-
Walter Storholt:
Yeah, well-known is maybe the better way to put it. Yeah.
Tyler Emrick:
Mm-hmm. But the S&P 500, again, I think most individuals would maybe, at first, think that’s pretty diversified investment. But in actuality, you look at these seven companies and how much they’re driving that performance, you really should take a step back and say, “Well, is that really the diversification that we want?” I mean, other parts of the US market have done better so far this year, and then you kind of look even more broadly and look at the global market. International and emerging market indexes were mostly all positive so far year-to-date, some of them up into double digits, in the first three months here. So, we’ve seen a pretty big swing here of what has done well so far this year has not necessarily been what’s done well over the last couple of years. And I think, again, it just goes back to that old adage of, how diversified is your portfolio? And when we go through times of volatility like this, leaning on that diversification is going to be all that much more important to help you ride out and smooth out some of these returns.
Walter Storholt:
Makes a lot of sense. Yep.
Tyler Emrick:
So aside from diversification, I think there’s another thing that I wanted to kind of speak to that I think is extremely valuable during times like this, and this is the idea of tax loss harvesting. It kind of goes back to that email that I had mentioned earlier in the podcast where I’d said, “Hey, I got an email and they said that I had noticed a little bit more trading in my account.” And really what we’re looking at there is that trading was us going in and doing what’s called tax lost harvesting.
Now for those that never heard this term before, tax lost harvesting essentially is the process of selling investments in a taxable account that have lost value to realize that loss for tax purposes. Now, the key here is this has got to be a taxable account, so tax loss harvesting is not going to really work in your retirement accounts, your Roths, and your IRAs. This would be money that you have set aside outside of your retirement accounts. Maybe you’re using a taxable brokerage account for investing, and you have different ETFs, mutual funds, stocks, whatever the case may be. Tax loss harvesting would be the idea of realizing some of those losses so that way you can have some tax benefits down the road.
So the question I guess becomes, well, it is like, “What are those tax benefits, and why might we be doing this?” Now, those losses that we realize can be used to offset capital gains in other parts of your portfolio. They can even offset up to about three grand of ordinary income if your losses exceed your gains of your portfolio. So, that’s a true tax benefit to you as you kind of think about 2025 and filing your 2025 return. I’m sure most people are still reeling with their ’24 returns and getting those done as we’re coming towards the end of April, or excuse me, the end of March here, and that April 15th tax deadline looming for most. But as we think about our trading and the tax loss harvesting that we’ve done over the last month, and that’s of course going to be on your 2025 tax return, but there is quite a bit of value there as we think about offsetting other portfolio gains.
Now, of course, those losses, if you end up realizing more losses than the 3,000 that you’re able to use to offset your ordinary income, those losses actually carry forward to future years, and can reduce taxes over time down the road, so you don’t necessarily lose those losses or the tax benefit. You might not be able to take them all in 2025, but you certainly can rack up those losses, and I’ve seen some tax returns where there’s been quite a bit of substantial losses racked up, and they just kind of carry over to the next year, and then use them as they come up.
Walter Storholt:
It helps to see some of those benefits of how you can kind of leverage these opportunities. And I’m trying to get more in the habit of that as well, Tyler, looking at market pullbacks, corrections, all these kinds of things as opportunities, not necessarily, oh, this is bad, but viewing it as an opportunity. It’s definitely a shift in mindset for some folks.
Tyler Emrick:
Sure. And there’s not only a tax benefit here, but there’s also the benefit of actually being able to efficiently rebalance your account, right? So, the old adage that you want to buy low sell high, effectively, that’s what we’re doing when we’re rebalancing account.
Walter Storholt:
Yeah, you’re buying stocks on sale in a way, right?
Tyler Emrick:
Mm-hmm. That’s the thought process there, right? Rebalancing really forces you to sell the high performing assets and buy those that are temporarily beaten down, and you’re getting better prices on it. You’re really trying to take advantage of the price swings without relying on the market. So, it’s not necessarily trading on emotion and selling because you think that the stock market’s going to continue to go down, or whatever the case may be, or buying an investment because hey, you’re trying to ride an upswing or whatever the case is. Rebalancing is just systematically making sure that you are buying low and selling high, and maintaining the risk level of your account, right? So, in volatile markets, rebalancing helps you keep that risk profile consistent with your goals and your comfort level.
I mean, when we’ve seen big swings, like really the big one that kind of sticks in my mind is that March of 2020 COVID drop where the stock market dropped roughly 30% in one month, I mean, that’s a pretty bad month. Well, I mean, we’re saying this one’s down around eight to 10, depending on the index that you look at. I mean, March of 2020, we’ve seen about a 30% drop in one month, so when you see volatility like that, if you’re not going in and you’re not rebalancing those accounts, well, what happens is your stocks become a smaller piece of your overall pie. And then if the market were to bounce back or eventually come back, you’re not going to be able to ride that upswing as much or as quickly as you fell, because your stock exposure is lower, so you truly got to go in there and rebalance and buy some of those investments that are down to make sure that you maintain the same level of risk, so that way you can ride the upswing to the same level as the down.
So, extremely important, and studies have shown this. We can go back to many, many different studies that have kind of shown that periodic rebalancing really improves the risk-adjusted returns over time, and it really ensures that you’re regularly taking gains and reinvesting into those undervalue areas of your portfolio.
Walter Storholt:
I would just like to point out from your chart that we covered a few minutes ago, the 30% drop happens about every 10 years, and we just so happened to have passed that five-year anniversary of the drop from COVID. So, I’m not saying you’re safe for another five years, of course, but yeah.
Tyler Emrick:
Yeah, but it does. It happens, right? It’s not uncommon, and this is where we lean really heavily on historical market performance and the data, and really, I think understanding that data really puts you in a better position to make better investment decisions, because it’s hard. Anytime you’re seeing volatility, there can be a lot of emotion involved in there, and understanding these rules and having some of this stuff put in place really helps you invest more smartly and certainly taking some of the emotion out of it, right?
Rebalancing is so big when you look at your overall performance over the long term. I mean, you go back to the Vanguard study that we reference quite a bit. I mean, they believe that just systematically rebalancing your portfolio over time can add upwards of almost a half a percent of return per year. And if you do it in taxable accounts, that could add almost up to 1% per year in tax alpha. They’re really getting to this tax loss harvesting that we had mentioned before, and how much over time that could really add to your overall performance in the account.
And it’s not just Vanguard. I mean, BlackRock did a study in 2021, going back to actually March of 2020, that big drop that we had mentioned, and from their study, they believe that individuals that rebalanced during March of 2020 captured up to 2% higher returns over the following 12 months than those who didn’t. I mean, 2% of your account values, I mean, that’s not an insignificant amount of money just for going in and saying, “Hey, I’m going to be disciplined and I’m going to rebalance my account and just make sure that my risk stays proportionate to where it was before.” Extremely important.
Walter Storholt:
Yeah, makes a lot of sense. And I know that there can be some hesitation to this, Tyler, because I feel it too. Whenever I hear “tax loss harvesting,” I just have this natural aversion to not wanting to sell anything that’s a loss. There’s just this mental block where I might hold … I have an account that I call the I’m stupid account, and I only use it for very risky investments, and it’s not much. It’s just to have fun.
Tyler Emrick:
We call it a hobby account. Same thing. Yes.
Walter Storholt:
It’s a hobby account. It’s a fun money. I call it the I’m stupid account, because if I had just applied the common sense rather than the emotions, I’d be a millionaire. But because I let my emotions get in the way often in that account, I just constantly make bad decisions.
Tyler Emrick:
Sure.
Walter Storholt:
But in any event, one of those bad decisions is I’m always like, “Ooh, I’m down a little bit. Better not back out because I want this to all be winners.” Just hold on too long.
Tyler Emrick:
Yes, or hold on to it until it makes its money back, right?
Walter Storholt:
Yes.
Tyler Emrick:
I mean, you’re not alone. I mean, we talk about emotional biases on the podcast quite a bit. I’m really fascinated with the emotional side of investing, right? And I think tax loss harvesting, certainly can go against some of those biases. And too, I mean, the whole buy and hold strategy, like, “Hey, I’m just going to forget about it. I’m a buy and hold investor.” I mean, you’re talking about really two extremes here with those comments, and tax loss harvesting really isn’t about losing money. It isn’t about churning investments and trying to catch the next wave. It’s really just about recognizing a paper loss that already exists, using it strategically for tax benefits, and then reinvesting it so you stay in the market.
Again, we want to be in the market, we want to invest during these times. We just want to make sure that we do it smartly. And I look at tax loss harvesting not as a bet on a direction of the market, but more so a smart way to take advantage of what’s in front of you in the market and making sure that you’re staying disciplined. And we want to make sure that we’re doing it within that framework, and really want to make sure that we have a process in place.
I mean, really, if you’re looking back on your accounts and the first quarter statements and there really hasn’t been any changes, or if you haven’t necessarily … You look at your advisors and they haven’t made any changes in the account for a period of time, you certainly want to go back in and say, “Hey, did we miss an opportunity? Did we not?” And you obviously don’t want to be just making changes to make changes. That’s not what we’re trying to do here. What we’re trying to do here is just saying, “Hey, are we capitalizing on all the opportunities that are presented to us and doing it in a smart way?” I think that’s very, very important.
Walter Storholt:
Well, a few months ago, Kevin came on for a series of episodes, gave you a little bit of a break, and he broke down in incredible detail the concept of tax-aware, long-short, TALS, was the name that you guys coined there.
Tyler Emrick:
TALS.
Walter Storholt:
Does that play a role in times like this? Is that something else that’s worth kind of, as you’re talking about tax loss harvesting, what about this sort of newer concept, or the one that you guys have been bringing to light more over the last couple of months?
Tyler Emrick:
It does. I mean, I think it’s really an extension and a strategy that’s really able to take advantage of the volatility in the market. I mean, you look at something like the S&P 500, for example, right? That’s 500 companies. It’s an index that we’ve talked about many times on the podcast here. In the last couple of years, ’23 and ’24, I mean, that index had wonderful performance, over 20% each of those two years. And I think when you break down the actual details in there, it can be fascinating to find out that actually about a quarter of the names in the S&P 500, so, what, about 125 companies or so, were actually down more than 5% in each of those years. So, this index that had done so well over the ’23 and ’24, a quarter of the names in there were actually down more than 5%. I think that’s staggering and really gets at this idea of really just how volatile the stock market can be.
And when you look at the TALS strategy, tax-aware, long-short strategy, it’s really meant to take advantage of that volatility. I think about some of the families, and some of the tax benefits, we’re starting to see some of the tax benefits of that strategy because we’re getting ready to file 2024 tax returns. I mean, we had an individual in there that implemented that strategy in Q4 and cut their tax bill by almost $400,000 by simply utilizing some of this tax lost harvesting, this idea within a cohesive strategy from an investment, and the returns were quite favorable as well. So, we definitely don’t want to be letting the tax benefits outweigh the actual investing, but if we can do it in conjunction together, smartly, efficiently, and effectively, then it can really be a win-win, not only from a performance standpoint, but also from a tax standpoint as well.
And I mean, I think this goes back to anything that we talked about here today to do during volatile times, right? Making sure that you’re diversified, tax lost harvesting, maybe you’re doing some of these more complex tax strategies where you’re really focusing on harvesting some of these losses. Whatever the case is, you’re really going to need to make sure that your investment advisor and your tax professional and everybody’s really on the same page, and understands what the goal is and what you’re trying to take advantage of, and making sure that you’re utilizing all the benefits that are afforded to you in a cohesive strategy.
So, at the end of the day here, we think about the recent pullback that we’ve had in the past month. Not too uncommon when we look at the data there, but more importantly, how are you managing times of volatility, and how does it fit into your overall plan? And certainly if you haven’t thought about that or if you haven’t made any changes in the last month, and you look back and maybe you missed some of these opportunities, I think it’s just a good time to take a look at your plan and reevaluate the investment strategy, and making sure that you’re on board and on top of it when the next bout happens. Because inevitably it will, if you’re going to be investing in the stock market.
Walter Storholt:
Again, a lot of opportunities out there, but you’ve got to be positioned ahead of time for these things to be their most effective. And so, schedule a time to visit now while you’re thinking about it with Tyler Emrick and the great team at True Wealth Design. It’s really easy.
In fact, to get in touch with Tyler and the team, all you have to do is go to truewealthdesign.com. Look for the Let’s Talk button, and you can schedule your 20-minute discovery meeting with an experienced advisor on the team. Again, that’s at truewealthdesign.com, or you can call 855-TWD-PLAN. All the contact info is in the description of today’s show. We’ll also link there to the series that we did on TALS, if you want to dive a little bit deeper into that strategy and into that concept. Kevin broke it down in great detail for us a couple of months back. We’ll link to that in the description so you can find it pretty easily, or just scroll back on your podcasting app a couple of months, and you should be able to easily spot that series from a few months ago.
Tyler, great breakdown on everything. I feel like I’m not panicking anymore. That was in the title and it was appropriate because I think that was happening to a lot of folks over the last couple of weeks and just kind of wondering what was going to go on. And it doesn’t mean the volatility’s over by any stretch, right? We don’t know what’s to come, but we know that we have plans available to us to deal with these things when they happen, and I think that’s the big takeaway.
Tyler Emrick:
Absolutely.
Walter Storholt:
Excellent. Well, my friend, I hope you have a great rest of your week, and we’ll be talking again in April. Spring, I think, finally arriving, hopefully for you and the family, so you guys can get out and about and hopefully do some fun stuff coming up later this spring.
Tyler Emrick:
Oh, yeah, absolutely.
Walter Storholt:
Fingers crossed for some good spring weather for everybody.
Tyler Emrick:
Good weather. Good weather, especially here in northeast Ohio.
Walter Storholt:
You got it. You’re like, you’re not counting your chickens yet before they hatch.
Tyler Emrick:
No, you never know what you’re going to get. You could still get snow here.
Walter Storholt:
You’re like, “Hold on. I’ll wait until May before I declare winter [inaudible 00:29:34] love it. Well, thanks for joining us, everybody. We’ll see you next time right back here on Retire Smart.
Speaker 3:
Information provided is for informational purposes only and does not constitute investment, tax, or legal advice. Information is obtained from sources that are deemed to be reliable, but their accurateness and completeness cannot be guaranteed. All performance reference is historical and not an indication of future results. Benchmark indices are hypothetical and do not include any investment fees.
Don’t Panic: Navigating Market Downturns and Boosting After-Tax Returns
Listen Now:
The Smart Take:
If the recent market drop has you feeling uneasy, you’re not alone — but sharp swings are regularities you need to navigate. The S&P 500 and Nasdaq have both taken hits this year, but history shows that intra-year declines like these are common and something long-term investors have weathered time and again.
In this episode, Tyler Emrick, CFA®, CFP®, breaks down recent market moves, highlights where diversification is working, and shares how tax strategies and disciplined rebalancing can help keep your investment strategy running smoothing and financial plan on track.
Here’s some of what we discuss in this episode:
📉 Market pullbacks are normal—even healthy
📊 Diversification is your protection in volatile times
🔁 Rebalancing can improve long-term returns
💸 Tax-loss harvesting can create future tax benefits
🧠 Discipline beats emotion when markets get rocky
Learn more about the Retire Smarter Solution ™: https://www.truewealthdesign.com/ep-45-retire-smarter-solution/
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The Hosts:
Kevin Kroskey, CFP®, MBA – About – Contact
Tyler Emrick, CFA®, CFP® – About – Contact
Episode Transcript:
Tyler Emrick:
The markets have been on a wild ride lately, and if you’re feeling uneasy, you’re not alone. Today, we’ll help you put these market moves in perspective, show you why this isn’t anything new, and help explain how disciplined planning can actually turn volatility into an opportunity. All that and more coming up today on Retire Smarter.
Walter Storholt:
Hey, welcome to another edition of Retire Smarter. Walter Storholt here alongside Tyler Emrick today. We’ve got a great episode on the way that will hopefully maybe calm a little nerve. I like the title of this one today, Tyler, Don’t Panic, because I feel like there’s been a little bit of that lately, just a slight bit, so this’ll be good.
If you’re new to the show, by the way, Tyler is a Chartered Financial Analyst. He’s also a Certified Financial Planner and Wealth Advisor at True Wealth Design based out of northeast Ohio but serving clients all across the country. You can find us online at truewealthdesign.com. For more episodes and information, be sure to check out the blog. It’s got lots of exclusive content and great information there as well. Tyler, how’s it going, before we dive into the don’t panic part of this?
Tyler Emrick:
Oh, hanging in there. Doing pretty well. I think we’re in the throes of March Madness basketball.
Walter Storholt:
That’s right.
Tyler Emrick:
I know we were talking a little bit beforehand, there hadn’t been too many upsets, but no shortage of good games to watch on TV.
Walter Storholt:
Yeah, my Tar Heels bowed out early, unfortunately.
Tyler Emrick:
Bracket’s not doing too well.
Walter Storholt:
But that’s just part of the deal. Wasn’t our year for sure.
Tyler Emrick:
Yeah. What’s that team again?
Walter Storholt:
The Tar Heels, Carolina?
Tyler Emrick:
Oh, yeah, Carolina. Okay, fair enough.
Walter Storholt:
I’m pretty much going to have to be an anybody but Duke fan at this point, so I don’t care who wins at this point, just don’t let it be Duke is what most of us Carolina fans switch to once this happens.
Tyler Emrick:
Yeah, I can understand the rivalry. I’m a big Buckeye State fan, so a similar concept with Michigan.
Walter Storholt:
Yeah, like you do not want to see Michigan keep going through, right?
Tyler Emrick:
That’s right. Yeah. Buckeyes didn’t make the tourney this year, so in basketball, so we did pretty good in football if you haven’t heard, but basketball, they kind of missed the boat here. So I’m wide open just hoping my bracket does well, which, you know, didn’t, so we’ll see.
Walter Storholt:
Yeah. I’m not checking mine. Last I did, it was pretty far at the bottom. Maybe I’ve rallied and come back, but I’m going to give it a few more days before I peek in there. It’s kind of like looking at the stock market. Look at this segue, by the way. Got to pat myself on the back. Boy, when there’s a lot of volatility, you’re either one of two people, right? You’re constantly checking it and stressing over that falling number, or maybe you’re a stick-your-head-in-the-sand person, like, “I’m not going to log into my accounts and look at how bad the last few days have been.”
Tyler Emrick:
Right. Yeah. Well, what triggered even the podcast today is actually, I got an email from one of the individuals I work with and they’re like, “Hey, we noticed there was some trading in the account here recently. What’s going on?” And you know, “Give me a little bit of an update here.” So I was like, “Oh, huh, okay. No, that makes sense.” And it got me thinking about, well, we have certainly had a bit of a pullback in the market. Let’s take a little bit of time to just put it into perspective, talk about some of the recent market volatility. Maybe we have … certainly have some suggestions on what you should be doing when the market has pullbacks like we’ve seen in the last month. And then just hopefully set the tone and give individuals and families a bit of an idea on what they should be thinking about and what they should be doing when they hear all these headlines around the stock market and performance and pullbacks.
Walter Storholt:
Well, sure. I think even hearing you say, like, “Oh, I noticed some trading was happening in my account,” and immediately I’m thinking, “Oh, well, but if the market was down, like, don’t sell when it’s down.” So I’m sure that maybe causes confusion too, right?
Tyler Emrick:
Sure, it is. Absolutely. Well, and I think a lot of these phrases like buy and hold tragedies and so on and so forth are ingrained, and certainly it can be very, very good advice. But as we’ll kind of get into here today on the podcast, that trading is done with a purpose, and you know, there’s very specific reasons as to why we want to do it, and I think it would be good for us to kind of share that to the listeners here today.
But as we kind of think about, well, what has transpired over the last month, well, we kind of look at just a few indexes here, and the S&P 500’s probably the most widely quoted index. If you’re listening to the news or reading articles or so on and so forth, a lot of times they’re going to latch onto that S&P 500, which is just 500 US-based companies. That’s down about 8% in the last month. You look at other parts of the market or other indexes like maybe the NASDAQ-100, which is, again, just 100 companies, non-financial companies, typically they weight a little bit more towards tech companies, that was down almost 11% in the last month. So, you start to see drops like that over a 30-day period, certainly I think it can arise some questions.
I think it’s good to take a step back when that happens and really just figure out and say, “Well, in the grand scheme of things, how big are these pullbacks? And what does the stock market volatility, how does it kind of rear its head?” So I’m curious … Well, some of the first stats that I have here to share to set that perspective a little bit talks a little bit about S&P 500 declines in a given year, how much the S&P 500 declines average in a given year. So, this doesn’t necessarily mean that, hey, how much does the S&P 500 lose in a given year or make in a given year, it’s really just a drop within that year. We call it an intra-year decline. Any guess on what the average is? And you can cheat a little bit if you have some notes in front of you.
Walter Storholt:
Yeah, I have your notes in front of me. I was just going to say, I thought it was interesting, a 1% decline is 100%. It makes sense, right? Like, okay, that’s going to happen, so let’s get over it.
Tyler Emrick:
Yes, yup. Hey, yup, the S&P 500-
Walter Storholt:
And it puts the rest of these into some perspective like, oh, this is going to happen. It’s okay.
Tyler Emrick:
It does. It does. Well, and I think the number that the S&P 500 drops on average per year is kind of staggering and maybe even a little high to some listeners. It’s a little over 14%, right? So, what that says is-
Walter Storholt:
Oh, I would say that’s a little staggering to think about.
Tyler Emrick:
In a given year, the S&P 500 is, at some point in that year, going to drop by roughly 14% on average, and-
Walter Storholt:
And that means from wherever its high was, it’s going to have from a high to a low, 14 … Not necessarily the start of the year going down the 14%, but there could be a rally and then a drop, and that’s your logging your drop.
Tyler Emrick:
Correct, correct. You got it. It could be at any given point throughout that year. And of course, that might seem like a lot, but you say that in the backdrop of, well, hey, if we go back in the last 45 years, almost 75% of the time, annual returns were positive. Okay, well, that 14% drop doesn’t necessarily mean that that’s how it’s going to end up for the year. That’s just the [inaudible 00:06:43]
Walter Storholt:
It’s a really good lesson in volatility versus returns.
Tyler Emrick:
It is. It is. Well, and then to your point, that nice colorful chart that you’re probably taking a look at here, where it kind of, I think, is another way to look at it is that, well, how many years on average do we experience big drops? So, the drop that we just had, what we’d say it was? About 8% or so in the last 30 days? A drop like that average happens about every year in the S&P 500, so that is not uncommon, really, at all for us to see the pullback that we’ve seen here recently.
You start expanding out that number a little bit and looking at bigger drops, I think it helps set some perspective as well. So, that chart that you’re looking at, a 15% drop happens about every two years or so. A 25% drop happens about every five years. So, these numbers are here just to kind of reiterate the fact that hey, stocks can be pretty volatile, and in most years, that volatility is going to rear its head at some point throughout the year. Doesn’t necessarily mean that it’s going to be a bad year from a performance standpoint. It just means that, hey, this is what we mean when we say, “Hey, the stock market is going to have some ups and downs at any given point in time, and certainly you’re going to be taking on some risk when you invest in the stock market.”
Walter Storholt:
It’d be pretty interesting to see each of those drop metrics, then the percentage of years in those categories that ended up with a positive return at the end of the year.
Tyler Emrick:
At the end of the year.
Walter Storholt:
I’m not asking you to go do that research.
Tyler Emrick:
Yeah, well, a quick math? We’ve got the calculator here. Yeah, I don’t know that per se, but I can tell you what I mean. The S&P 500 generally is going to average about a 10% return per year, going back over time. So, you get paid for taking on that risk.
Walter Storholt:
And you said that 34 out of 45 years had positive annual returns.
Tyler Emrick:
Mm-hmm. It did, yep. Going back to, I think, 1980 is the stats that we looked at from there. Yeah, 34 out of 45 years, positive returns in the S&P 500, so that’s why the old adage is stay invested and ride out some of these ups and downswings. But as we kind of look at the recent volatility that we’ve had, I think we can dissect it even a little bit further, and I think it’ll talk to us a little bit about the importance of diversification. I mean, because you think about just in general, what helps individuals and families get through this volatility, and I think diversification of your portfolio is really going to be your guiding star, and certainly help you when we experience an 8%, 10% drop in a given month or a 30-day time period.
Now you look at the performance this year in stocks, and the pain has been in really US large cap and US small cap growth stocks. Now, growth is just a term that we use to kind of identify and quantify certain stocks that are companies that are really expected to grow faster than average, even if they look expensive. And the trade-off there is that these types of stocks have higher potential upside at higher risk, and certainly higher volatility. So if we look at this year and say, “Well, large cap or big companies, growth-oriented, are down about 8%, and small cap, small companies that are growth-oriented, are down about 8%.” And you kind of categorize that against other parts of the US stock market, well, other parts of the US stock market that were maybe better priced or more fairly priced have done well or down less, right? Large cap value type investors are actually positive for the year.
So, we’ve seen a pullback, and that pullback has been really hit hard into a couple specific parts of the US stock market, which goes back to that whole adage of, are you diversified? If you look at your portfolio over the first three months of the year here and you’re seeing double-digit returns down in your stocks, well, if you dissect that a little bit more and say, “Well, what am I overweight and where do I have my exposures at?” You’re probably going to find that, hey, you might be overweight toward those big large tech companies or somewhere in the small growth space that has seen the most pain. And then you got to really ask yourself, and take a step back and, “Well, hey, do we want to diversify, and will we get some value during volatile times like this to kind of smooth out the ride, not having all our eggs in one basket per se?”
Walter Storholt:
Yeah, makes a lot of sense. These kinds of times are good gut checks too for your diversification, right? This is when if you’re expecting, okay, the market as a whole is down 7% or whatever, I’m down 30, hmm.
Tyler Emrick:
What’s going on here? Yes.
Walter Storholt:
A clue, I’m out of whack maybe a little bit, unless you know that’s the purpose of your account or something, but …
Tyler Emrick:
Is that right? Well, and that can be like, hey, do you have too much money in one particular name or one particular stock? Do you have it all in large US growth-oriented companies? So on and so forth. I think what’s fascinating too is a lot of individuals, and we’ve done some podcasts on this in the past, where a lot of individuals will invest in an S&P 500 index fund and say, “Hey, that’s as diversified as what I need to be.” But you kind of look at the S&P 500 performance so far here, year-to-date, I think it’s down just under, like around 4% or so, 3.7% here, at least at the numbers that we’re looking at. And you kind of think about that S&P 500 and say, “Well, that’s 500 companies, US-based,” but that is a market cap-weighted index. So, what that means is that the bigger companies are going to drive more of that performance.
I’m sure, Walter, you’ve ran across the Mag 7 at some point in your readings, these seven big companies that have driven a lot of the US performance here in the last really handful of years. These are like your Microsofts, Apple, Google, Amazon, NVIDIA, Tesla, companies like that, the big seven, have really driven a substantial part of the S&P 500 performance in ’23 and ’24. You kind of pull those seven companies out of the S&P 500 and look at the S&P 500 performance, or the other 493 stocks, the S&P 500 is actually up year-to-date a little over a half a percent. So, the pain has been really in some of those big tech names that have done pretty well over the last couple of years.
Walter Storholt:
That’s interesting. It’s also interesting to see the reactions to things like this. I googled Mag 7 as you were talking about it, and it’s funny, the first news result that comes back is, “The Mag 7 are dead money. Here’s what to invest in instead.”
Tyler Emrick:
Hey, don’t get caught up in those headlines, Walt. You want to be like me, right? Hey, I’m always coming up with podcast titles on these crazy headlines.
Walter Storholt:
That’s right. I’m going to send this one over to you. It might catch your eye, right? But talk about, I mean, I don’t even have to read the article to feel like that’s an overreaction, right?
Tyler Emrick:
Sure, yeah. And they’re always trying to catch you to try to get in and look and read and get those clicks, but to the point-
Walter Storholt:
That was on Barron’s.
Tyler Emrick:
Was it?
Walter Storholt:
I would think people would see that name and think, “Pretty reputable.”
Tyler Emrick:
Very reputable, mm-hmm, yep, or certainly a more well-known name in the industry, for sure, but-
Walter Storholt:
Yeah, well-known is maybe the better way to put it. Yeah.
Tyler Emrick:
Mm-hmm. But the S&P 500, again, I think most individuals would maybe, at first, think that’s pretty diversified investment. But in actuality, you look at these seven companies and how much they’re driving that performance, you really should take a step back and say, “Well, is that really the diversification that we want?” I mean, other parts of the US market have done better so far this year, and then you kind of look even more broadly and look at the global market. International and emerging market indexes were mostly all positive so far year-to-date, some of them up into double digits, in the first three months here. So, we’ve seen a pretty big swing here of what has done well so far this year has not necessarily been what’s done well over the last couple of years. And I think, again, it just goes back to that old adage of, how diversified is your portfolio? And when we go through times of volatility like this, leaning on that diversification is going to be all that much more important to help you ride out and smooth out some of these returns.
Walter Storholt:
Makes a lot of sense. Yep.
Tyler Emrick:
So aside from diversification, I think there’s another thing that I wanted to kind of speak to that I think is extremely valuable during times like this, and this is the idea of tax loss harvesting. It kind of goes back to that email that I had mentioned earlier in the podcast where I’d said, “Hey, I got an email and they said that I had noticed a little bit more trading in my account.” And really what we’re looking at there is that trading was us going in and doing what’s called tax lost harvesting.
Now for those that never heard this term before, tax lost harvesting essentially is the process of selling investments in a taxable account that have lost value to realize that loss for tax purposes. Now, the key here is this has got to be a taxable account, so tax loss harvesting is not going to really work in your retirement accounts, your Roths, and your IRAs. This would be money that you have set aside outside of your retirement accounts. Maybe you’re using a taxable brokerage account for investing, and you have different ETFs, mutual funds, stocks, whatever the case may be. Tax loss harvesting would be the idea of realizing some of those losses so that way you can have some tax benefits down the road.
So the question I guess becomes, well, it is like, “What are those tax benefits, and why might we be doing this?” Now, those losses that we realize can be used to offset capital gains in other parts of your portfolio. They can even offset up to about three grand of ordinary income if your losses exceed your gains of your portfolio. So, that’s a true tax benefit to you as you kind of think about 2025 and filing your 2025 return. I’m sure most people are still reeling with their ’24 returns and getting those done as we’re coming towards the end of April, or excuse me, the end of March here, and that April 15th tax deadline looming for most. But as we think about our trading and the tax loss harvesting that we’ve done over the last month, and that’s of course going to be on your 2025 tax return, but there is quite a bit of value there as we think about offsetting other portfolio gains.
Now, of course, those losses, if you end up realizing more losses than the 3,000 that you’re able to use to offset your ordinary income, those losses actually carry forward to future years, and can reduce taxes over time down the road, so you don’t necessarily lose those losses or the tax benefit. You might not be able to take them all in 2025, but you certainly can rack up those losses, and I’ve seen some tax returns where there’s been quite a bit of substantial losses racked up, and they just kind of carry over to the next year, and then use them as they come up.
Walter Storholt:
It helps to see some of those benefits of how you can kind of leverage these opportunities. And I’m trying to get more in the habit of that as well, Tyler, looking at market pullbacks, corrections, all these kinds of things as opportunities, not necessarily, oh, this is bad, but viewing it as an opportunity. It’s definitely a shift in mindset for some folks.
Tyler Emrick:
Sure. And there’s not only a tax benefit here, but there’s also the benefit of actually being able to efficiently rebalance your account, right? So, the old adage that you want to buy low sell high, effectively, that’s what we’re doing when we’re rebalancing account.
Walter Storholt:
Yeah, you’re buying stocks on sale in a way, right?
Tyler Emrick:
Mm-hmm. That’s the thought process there, right? Rebalancing really forces you to sell the high performing assets and buy those that are temporarily beaten down, and you’re getting better prices on it. You’re really trying to take advantage of the price swings without relying on the market. So, it’s not necessarily trading on emotion and selling because you think that the stock market’s going to continue to go down, or whatever the case may be, or buying an investment because hey, you’re trying to ride an upswing or whatever the case is. Rebalancing is just systematically making sure that you are buying low and selling high, and maintaining the risk level of your account, right? So, in volatile markets, rebalancing helps you keep that risk profile consistent with your goals and your comfort level.
I mean, when we’ve seen big swings, like really the big one that kind of sticks in my mind is that March of 2020 COVID drop where the stock market dropped roughly 30% in one month, I mean, that’s a pretty bad month. Well, I mean, we’re saying this one’s down around eight to 10, depending on the index that you look at. I mean, March of 2020, we’ve seen about a 30% drop in one month, so when you see volatility like that, if you’re not going in and you’re not rebalancing those accounts, well, what happens is your stocks become a smaller piece of your overall pie. And then if the market were to bounce back or eventually come back, you’re not going to be able to ride that upswing as much or as quickly as you fell, because your stock exposure is lower, so you truly got to go in there and rebalance and buy some of those investments that are down to make sure that you maintain the same level of risk, so that way you can ride the upswing to the same level as the down.
So, extremely important, and studies have shown this. We can go back to many, many different studies that have kind of shown that periodic rebalancing really improves the risk-adjusted returns over time, and it really ensures that you’re regularly taking gains and reinvesting into those undervalue areas of your portfolio.
Walter Storholt:
I would just like to point out from your chart that we covered a few minutes ago, the 30% drop happens about every 10 years, and we just so happened to have passed that five-year anniversary of the drop from COVID. So, I’m not saying you’re safe for another five years, of course, but yeah.
Tyler Emrick:
Yeah, but it does. It happens, right? It’s not uncommon, and this is where we lean really heavily on historical market performance and the data, and really, I think understanding that data really puts you in a better position to make better investment decisions, because it’s hard. Anytime you’re seeing volatility, there can be a lot of emotion involved in there, and understanding these rules and having some of this stuff put in place really helps you invest more smartly and certainly taking some of the emotion out of it, right?
Rebalancing is so big when you look at your overall performance over the long term. I mean, you go back to the Vanguard study that we reference quite a bit. I mean, they believe that just systematically rebalancing your portfolio over time can add upwards of almost a half a percent of return per year. And if you do it in taxable accounts, that could add almost up to 1% per year in tax alpha. They’re really getting to this tax loss harvesting that we had mentioned before, and how much over time that could really add to your overall performance in the account.
And it’s not just Vanguard. I mean, BlackRock did a study in 2021, going back to actually March of 2020, that big drop that we had mentioned, and from their study, they believe that individuals that rebalanced during March of 2020 captured up to 2% higher returns over the following 12 months than those who didn’t. I mean, 2% of your account values, I mean, that’s not an insignificant amount of money just for going in and saying, “Hey, I’m going to be disciplined and I’m going to rebalance my account and just make sure that my risk stays proportionate to where it was before.” Extremely important.
Walter Storholt:
Yeah, makes a lot of sense. And I know that there can be some hesitation to this, Tyler, because I feel it too. Whenever I hear “tax loss harvesting,” I just have this natural aversion to not wanting to sell anything that’s a loss. There’s just this mental block where I might hold … I have an account that I call the I’m stupid account, and I only use it for very risky investments, and it’s not much. It’s just to have fun.
Tyler Emrick:
We call it a hobby account. Same thing. Yes.
Walter Storholt:
It’s a hobby account. It’s a fun money. I call it the I’m stupid account, because if I had just applied the common sense rather than the emotions, I’d be a millionaire. But because I let my emotions get in the way often in that account, I just constantly make bad decisions.
Tyler Emrick:
Sure.
Walter Storholt:
But in any event, one of those bad decisions is I’m always like, “Ooh, I’m down a little bit. Better not back out because I want this to all be winners.” Just hold on too long.
Tyler Emrick:
Yes, or hold on to it until it makes its money back, right?
Walter Storholt:
Yes.
Tyler Emrick:
I mean, you’re not alone. I mean, we talk about emotional biases on the podcast quite a bit. I’m really fascinated with the emotional side of investing, right? And I think tax loss harvesting, certainly can go against some of those biases. And too, I mean, the whole buy and hold strategy, like, “Hey, I’m just going to forget about it. I’m a buy and hold investor.” I mean, you’re talking about really two extremes here with those comments, and tax loss harvesting really isn’t about losing money. It isn’t about churning investments and trying to catch the next wave. It’s really just about recognizing a paper loss that already exists, using it strategically for tax benefits, and then reinvesting it so you stay in the market.
Again, we want to be in the market, we want to invest during these times. We just want to make sure that we do it smartly. And I look at tax loss harvesting not as a bet on a direction of the market, but more so a smart way to take advantage of what’s in front of you in the market and making sure that you’re staying disciplined. And we want to make sure that we’re doing it within that framework, and really want to make sure that we have a process in place.
I mean, really, if you’re looking back on your accounts and the first quarter statements and there really hasn’t been any changes, or if you haven’t necessarily … You look at your advisors and they haven’t made any changes in the account for a period of time, you certainly want to go back in and say, “Hey, did we miss an opportunity? Did we not?” And you obviously don’t want to be just making changes to make changes. That’s not what we’re trying to do here. What we’re trying to do here is just saying, “Hey, are we capitalizing on all the opportunities that are presented to us and doing it in a smart way?” I think that’s very, very important.
Walter Storholt:
Well, a few months ago, Kevin came on for a series of episodes, gave you a little bit of a break, and he broke down in incredible detail the concept of tax-aware, long-short, TALS, was the name that you guys coined there.
Tyler Emrick:
TALS.
Walter Storholt:
Does that play a role in times like this? Is that something else that’s worth kind of, as you’re talking about tax loss harvesting, what about this sort of newer concept, or the one that you guys have been bringing to light more over the last couple of months?
Tyler Emrick:
It does. I mean, I think it’s really an extension and a strategy that’s really able to take advantage of the volatility in the market. I mean, you look at something like the S&P 500, for example, right? That’s 500 companies. It’s an index that we’ve talked about many times on the podcast here. In the last couple of years, ’23 and ’24, I mean, that index had wonderful performance, over 20% each of those two years. And I think when you break down the actual details in there, it can be fascinating to find out that actually about a quarter of the names in the S&P 500, so, what, about 125 companies or so, were actually down more than 5% in each of those years. So, this index that had done so well over the ’23 and ’24, a quarter of the names in there were actually down more than 5%. I think that’s staggering and really gets at this idea of really just how volatile the stock market can be.
And when you look at the TALS strategy, tax-aware, long-short strategy, it’s really meant to take advantage of that volatility. I think about some of the families, and some of the tax benefits, we’re starting to see some of the tax benefits of that strategy because we’re getting ready to file 2024 tax returns. I mean, we had an individual in there that implemented that strategy in Q4 and cut their tax bill by almost $400,000 by simply utilizing some of this tax lost harvesting, this idea within a cohesive strategy from an investment, and the returns were quite favorable as well. So, we definitely don’t want to be letting the tax benefits outweigh the actual investing, but if we can do it in conjunction together, smartly, efficiently, and effectively, then it can really be a win-win, not only from a performance standpoint, but also from a tax standpoint as well.
And I mean, I think this goes back to anything that we talked about here today to do during volatile times, right? Making sure that you’re diversified, tax lost harvesting, maybe you’re doing some of these more complex tax strategies where you’re really focusing on harvesting some of these losses. Whatever the case is, you’re really going to need to make sure that your investment advisor and your tax professional and everybody’s really on the same page, and understands what the goal is and what you’re trying to take advantage of, and making sure that you’re utilizing all the benefits that are afforded to you in a cohesive strategy.
So, at the end of the day here, we think about the recent pullback that we’ve had in the past month. Not too uncommon when we look at the data there, but more importantly, how are you managing times of volatility, and how does it fit into your overall plan? And certainly if you haven’t thought about that or if you haven’t made any changes in the last month, and you look back and maybe you missed some of these opportunities, I think it’s just a good time to take a look at your plan and reevaluate the investment strategy, and making sure that you’re on board and on top of it when the next bout happens. Because inevitably it will, if you’re going to be investing in the stock market.
Walter Storholt:
Again, a lot of opportunities out there, but you’ve got to be positioned ahead of time for these things to be their most effective. And so, schedule a time to visit now while you’re thinking about it with Tyler Emrick and the great team at True Wealth Design. It’s really easy.
In fact, to get in touch with Tyler and the team, all you have to do is go to truewealthdesign.com. Look for the Let’s Talk button, and you can schedule your 20-minute discovery meeting with an experienced advisor on the team. Again, that’s at truewealthdesign.com, or you can call 855-TWD-PLAN. All the contact info is in the description of today’s show. We’ll also link there to the series that we did on TALS, if you want to dive a little bit deeper into that strategy and into that concept. Kevin broke it down in great detail for us a couple of months back. We’ll link to that in the description so you can find it pretty easily, or just scroll back on your podcasting app a couple of months, and you should be able to easily spot that series from a few months ago.
Tyler, great breakdown on everything. I feel like I’m not panicking anymore. That was in the title and it was appropriate because I think that was happening to a lot of folks over the last couple of weeks and just kind of wondering what was going to go on. And it doesn’t mean the volatility’s over by any stretch, right? We don’t know what’s to come, but we know that we have plans available to us to deal with these things when they happen, and I think that’s the big takeaway.
Tyler Emrick:
Absolutely.
Walter Storholt:
Excellent. Well, my friend, I hope you have a great rest of your week, and we’ll be talking again in April. Spring, I think, finally arriving, hopefully for you and the family, so you guys can get out and about and hopefully do some fun stuff coming up later this spring.
Tyler Emrick:
Oh, yeah, absolutely.
Walter Storholt:
Fingers crossed for some good spring weather for everybody.
Tyler Emrick:
Good weather. Good weather, especially here in northeast Ohio.
Walter Storholt:
You got it. You’re like, you’re not counting your chickens yet before they hatch.
Tyler Emrick:
No, you never know what you’re going to get. You could still get snow here.
Walter Storholt:
You’re like, “Hold on. I’ll wait until May before I declare winter [inaudible 00:29:34] love it. Well, thanks for joining us, everybody. We’ll see you next time right back here on Retire Smart.
Speaker 3:
Information provided is for informational purposes only and does not constitute investment, tax, or legal advice. Information is obtained from sources that are deemed to be reliable, but their accurateness and completeness cannot be guaranteed. All performance reference is historical and not an indication of future results. Benchmark indices are hypothetical and do not include any investment fees.
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