Consider portfolio and planning cleanup in volatile markets

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Consider portfolio and planning cleanup in volatile markets

Vanguard Perspective


September 16, 2022

Historically, staying the course has outperformed emotionally driven reactions such as going to cash amid periods of market volatility, when they happen to strike. But staying the course doesn't have to mean standing still.

Throughout this article, you will find resources that can help you reach out to clients, offer them perspective, and even discuss strategies to clean up their portfolios and retirement roadmaps. Whether initiated by you or held in response to a specific event, these conversations can help your clients leverage windows of market disruption for potential long-term benefit.

And importantly, these conversations provide critical touchpoints that let clients know you are thinking about them and about how to keep progress toward their goals on track. The discussion topics that follow offer a number of opportunities for you to demonstrate your value while encouraging clients to stick with their financial plans.

Staying the course doesn't have to mean standing still

Cleanup topics to review with clients

Asset allocation:

  • Consider rebalancing.
  • Reevaluate risk tolerance.
  • Review active versus passive holdings.
  • Review high-cost versus low-cost holdings.
  • Address concentrated equity positions.

Tax efficiency:

  • Review funds for tax efficiency.
  • Review accounts; consider rebalancing between accounts to improve asset location.
  • Evaluate the merits of a Roth conversion.

Retirement strategies:

  • Discuss strategies for spending in retirement.
  • Discuss withdrawal order from taxable and tax-advantaged accounts.
  • Discuss spending rates.
  • Review clients’ liquidity buffer.

Source: Vanguard.


Market disruption: An opening for discussion

When markets are down, you can frame conversations with clients as opportunities to consider a number of portfolio and plan-optimization approaches. During the long climb upward of bull markets, portfolios can easily skew out of balance as outperforming holdings make up an increasingly larger portion of a client's assets and create larger potential tax liabilities. Plans may require adjusting in light of new information.

A down market affords clients a chance to redeploy their capital in ways that, potentially, could more efficiently advance them toward achieving their financial goals.

The starting point for your conversation with each client will vary. You can prioritize your area of focus by applying a "three As" (assess, address, audit) framework to the client's situation. But, generally speaking, your cleaning up of client portfolios and plans should include reviews of their:

  • Asset allocation and related issues.
  • Tax efficiency via asset location and other means.
  • Retirement strategies.

Asset allocation

Assessing this dimension includes rebalancing—an activity that under ordinary market conditions might seem routine. Amid a downturn, however, clients' questions or concerns about rebalancing may open the door to a broader conversation about their risk tolerance. Has their appetite for risk changed since you originally helped them build a portfolio and accompanying financial plan? Has volatility revealed a gap between clients' previously stated risk tolerance and their actual appetite for risk in the moment?

Other considerations include evaluating the portfolio for the merits of active versus passive holdings; opportunities to swap high-cost funds and ETFs with low-cost replacements; and the chance to dilute and diversify concentrated equity positions, when share prices (and, thus, the possibility of adverse tax implications) are lower.

Tax efficiency

You can examine the tax efficiency of a client’s account both at the fund level and at the account level.

  • Fund level: Are funds (or the holdings in them) tax-efficient? If any are not (for example, a fund with a high turnover rate), can they be replaced with something that is?
  • Account level: This might be the time to consider rebalancing a client's accounts in a way similar to rebalancing their assets. At the outset, you may have advised the client to hold a certain percentage of assets in tax-advantaged accounts and the remainder in taxable accounts. Over time, as certain investments and asset classes outperform others, that ratio will increasingly skew from the original policy asset location. Thus, an opportunity arises to shift assets to once again align with the agreed-upon policy.

For some clients, it could make sense to consider a Roth conversion. In converting a traditional IRA or 401(k) to a Roth IRA, an investor shifts the timing for the payment of taxes on their investments.

With traditional retirement savings accounts, the investor makes tax-exempt contributions in the accumulation stage and pays taxes on distributions in retirement. Conversely, with a Roth, the investor makes contributions with after-tax dollars; the investor can take distributions tax-exempt, if certain time-of-ownership and age requirements are met.

When converting a traditional account (or a portion of it) to a Roth, taxes must be paid upfront on the amount being converted. During a downturn, when most asset prices are depressed, the tax bill will probably be lower than it would be were the assets trading at their "normal" valuations. Assuming those assets eventually rise in value again, performing a Roth conversion in a down market can provide a significant tax savings immediately. But it can also prove beneficial down the road, when the investor can potentially realize market gains and spend from the account tax-exempt, as well as enjoy other advantages.*

Determining if a Roth conversion is appropriate involves weighing trade-offs and making assumptions about future taxation levels, among other calculations. As an advisor, you're uniquely suited to help clients navigate such a complex choice.

Retirement strategies

Investors close to or in retirement may be worried about the adequacy of their nest eggs to fund their lifestyles after a market downturn drastically downsizes their portfolios. This is a good time to discuss (or revisit) strategies for spending in retirement, withdrawal order from taxable and tax-advantaged accounts, and spending rates.

More immediately, it might be beneficial to review with clients their short-term liquidity outlook. Ideally, investors close to or in retirement have some amount of cash or lower-risk assets to cover living expenses for a certain period—for instance, 12 to 18 months. If clients are concerned about a potential impending cash crunch, you can explore with them options to maintain a safe liquidity buffer.

For example, in selling bonds to shift back to their asset allocation target, they might consider keeping some of the proceeds as a cash cushion, rather than using all of the money to purchase stocks.

Clients can also consider dynamic spending strategies that flex according to market conditions, thus increasing the probability of a portfolio's long-term sustainability.

Ending on a positive note

While each market downturn has different causes and characteristics, you can help clients by reminding them that, historically, markets have recovered. The markets themselves, policymakers' actions, and unanticipated events such as pandemics are beyond our control. But resiliency, through planning, discipline, and thoughtful response to such events, is a lever we can use to great effect. And applying the Vanguard Advisor's Alpha® framework of portfolio construction, behavioral coaching, and financial planning, you can guide clients toward achieving their financial goals through strategic, well-reasoned decision-making.


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* Withdrawals from a Roth IRA are tax-exempt if you are over age 59½ and have held the account for at least five years; withdrawals taken prior to age 59½ or five years may be subject to ordinary income tax or a 10% federal penalty tax, or both. (A separate five-year period applies for each conversion and begins on the first day of the year in which the conversion contribution is made).



  • Please note that tax expectations relate to the overall federal tax landscape as well as your personal tax rate. You should consider your future marginal tax rate, not future income, when thinking about Roth conversions. Because tax brackets may be wide and filing status may change, changes in future income may or may not affect your future marginal tax rate.
  • All investing is subject to risk, including the possible loss of the money you invest. We recommend that you consult a tax or financial advisor about your individual situation.
  • Tax-loss harvesting involves certain risks, including, among others, the risk that the new investment could have higher costs than the original investment and could introduce portfolio tracking error into your accounts. There may also be unintended tax implications. We recommend that you carefully review the terms of the consent and consult a tax advisor before taking action.

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