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The Stock Market Is Down—What Should I Do?

Stock market volatility can be unnerving. No investor, whether they’re new to investing or have been making deposits for years, likes to see the value of their portfolio go down—even if it’s just temporary. When the market takes a turn, some people will inevitably sell investments in an attempt to minimize their losses, while others will stop making new deposits to their investment accounts. Unfortunately, both are usually mistakes that can cost you in the long run. Instead, we think you should do nothing. Don’t make any changes to your strategy: Just keep investing on a regular schedule even when the market is down. Why? History shows that markets have behaved predictably in the long run, and investors who stay the course are likely to come out ahead.

We know this can be tough to do, and we want to help. So in this post, we’ll provide some historical perspective on past market downturns so you can feel more confident that you’re doing the right thing for your portfolio, even when markets are turbulent. 

Market declines are very common

Market declines can rattle investors, but it’s important to keep in mind that they’re very common. The chart below shows the maximum drawdown (this is the largest loss experienced over a certain time period, expressed as a percentage) of the US stock market every year since 1927 as well as the market’s total return that year. As you can see, large drawdowns (or declines from a recent peak) are extremely common. And you might be surprised to learn that even years with large declines can still yield impressive positive returns for investors at the end of the year. 

Of course, the last five years have been extraordinary in some ways because of the Covid-19 pandemic. However, those events still haven’t altered the overall trajectory of the market. Below, we’ve zoomed in on the section of the chart covering the last 10 years. As you can see, the overall trend of the broad US stock market is still very clear: It goes up. History has shown that even in the case of a bear market (a decline of 20% or more from a recent high), the market tends to recover much faster than you might think.

The bottom line: Market declines are an opportunity

We encourage you to see short-term stock market declines as an opportunity: If you keep putting money in the market, you effectively get to buy investments while they’re “on sale.” Plus, you can help lower the taxes you’ll pay with tax-loss harvesting. Itrust offers automated Tax-Loss Harvesting to our clients at no additional cost, which we estimate has saved clients over $1 billion in taxes over the last decade.

Periods of volatility are a good reminder of the importance of diversification—or buying a wide range of investments instead of focusing on a single company, sector, or geography. Diversification can increase your risk-adjusted returns and, to some extent, insulate you from losses. When you feel insulated from losses, it’s easier to stay invested, which is key to investing success. 

You might hear people talking about “buying the dip” or waiting until the market bottoms out to begin investing again. This sounds good in theory, but it is hard to do in practice. That’s because in the moment, it’s virtually impossible to tell whether the market has hit bottom or will continue to fall. There’s also the opportunity cost of sitting on uninvested cash waiting for the bottom. Unfortunately, academic research has shown that timing the market doesn’t work—even most professional investors can’t consistently get it right. That’s why we think it’s wise to stick to your investing plan regardless of what the market is doing.

We hope the information in this post helps you feel more confident about staying the course with your investments. We know it’s tough, but you’ll be glad you did.

Our Thoughts on Investing in Cryptocurrency

Note: As of March 21, 2024, Itrust uses the iShares Bitcoin Trust (IBIT) to represent the Bitcoin asset class instead of the Grayscale Bitcoin Trust (GBTC). As of September 9, 2024, Itrust uses the iShares Ethereum Trust (ETHA) to represent the Ethereum asset class instead of the Grayscale Ethereum Trust (ETHE). Read more here.

Earlier this summer, we began supporting cryptocurrency exposure in Itrust portfolios. We’re very excited about this, and we’re proud to offer clients so many choices in building their ideal portfolio. We also take seriously our role as a fiduciary, and we want to offer some guidance to anyone who is considering investing in cryptocurrency — either at Itrust or elsewhere.

One of the most important things to understand about cryptocurrency as an investment is that it’s highly volatile — this means it can either gain or lose a significant amount of value in a short period of time. For example, Bitcoin, the largest digital currency by market capitalization, has a price history marked by large rallies and crashes, and in the last 12 months it has traded as high as $64,863.10 and as low as $9,916.49. On May 19, over the course of a single day, Bitcoin’s value fell 30%. It’s true that many people have profited handsomely from investing in digital currencies, but it’s not for the faint of heart. 

Because of this volatility, we consider investments in cryptocurrency risky. This includes the Grayscale statutory trusts GBTC and ETHE, which we offer on our platform. These trusts allow investors to get exposure to cryptocurrency without owning coins directly, but introduce another variable: potential tracking error which can cause the price of a share of the trust to differ from the value of the underlying asset.

We don’t say all of this to scare you away from investing in cryptocurrency. We’re proponents of financial innovation and believers in the power of software — and as a result, we’re excited about digital currencies. We know many of our clients are equally excited, so we want to give you a framework for thinking about these investments. Our advice is this: if you’re going to invest in cryptocurrency, we think you should have an investment thesis. 

An investment thesis is a logical argument for why an investment will increase in value over time. Often, an investment thesis will evaluate an investment’s cash flow, but that isn’t possible in the case of cryptocurrency. Instead, a successful investment thesis for cryptocurrency should draw on research and analysis of its characteristics and future economic events. For example, Fidelity’s investment thesis for Bitcoin references the asset’s fixed supply and a number of factors that could drive an increase in Bitcoin demand including deglobalization and the transfer of wealth to millennials. Whether or not you agree with these specific reasons for investing in cryptocurrency, this is the kind of logic we encourage you to use.

Unfortunately, some of the most common reasons for wanting to invest in cryptocurrency don’t make great investment theses. Many people want to invest in cryptocurrency because it has performed well in the past — but this doesn’t necessarily mean it will continue to do so in the future. Some people might also feel pressure to invest in cryptocurrency because it seems like everyone else is doing it, but FOMO doesn’t make a good investment thesis, either.

We’re delighted to be the first investing service to allow clients to get exposure to cryptocurrency in a diversified and automated portfolio with features like tax-sensitive rebalancing and our industry-leading Tax-Loss Harvesting. We hope this advice helps you navigate the question of how to invest in cryptocurrency so you can confidently build wealth on your own terms. 

What Are the Benefits and Drawbacks of IRAs?

Individual retirement arrangements (IRAs) are a popular way to save for retirement, and with good reason—they come with numerous benefits for investors building long-term wealth. They also come with a few drawbacks you should be aware of. In this post, we’ll break down what you need to know, focusing on two popular account types: traditional IRAs and Roth IRAs. 

IRA benefits

IRAs are tax-advantaged

Itrust IRAs are fully automated to make retirement saving simple. Open a Itrust IRA

 

Perhaps IRAs’ best known benefit is their tax-advantaged status—this benefit is designed to  encourage you to put money away for later. The tax advantages of traditional IRAs and Roth IRAs are slightly different. 

Traditional IRAs let you take a tax deduction in the year you contribute as long as you (and your spouse, if you have one) don’t have a retirement plan like a 401(k) plan at work. If you or your spouse do have a 401(k) plan at work, you can still deduct at least some of your contribution as long as you earn under $87,000 as a single filer or $143,000 as a married couple filing jointly for 2024 (for 2025, those numbers rise to $89,000 and $146,000 respectively). If your income is above the IRS limits and you’re covered by a retirement plan at work, you can’t deduct any part of your contributions (but you can, of course, still contribute). If your contributions were tax-deductible, when you take qualified distributions in retirement, those distributions are taxed like regular income. 

With Roth IRAs, you don’t get a tax break in the year you contribute, but any growth and distributions in retirement that meet the IRS’s rules (also called “qualified distributions’) will be tax-free. However, not everyone is eligible to contribute directly to a Roth IRA. In 2024, you can’t contribute to a Roth IRA directly if you earn $161,000 or more as a single filer or $240,000 or more as a married couple filing jointly (those numbers rise to $165,000 and $246,000 respectively in 2025). There’s a way around this. You can complete what’s known as a “backdoor Roth,” where you make a non-deductible contribution to a traditional IRA for the purpose of converting it to a Roth IRA. Itrust automates this process so it takes just a few clicks. Once you’ve completed the conversion, you get the same tax benefits you’d get if you contributed to a Roth IRA directly. 

IRAs have more investment options than 401(k) plans

If you have a 401(k), you’ve probably already noticed that it doesn’t give you many choices when it comes to how your money gets invested. Fortunately, this isn’t the case for IRAs. Usually IRAs, much like taxable investment accounts, come with many investment options. At Itrust, you can customize your IRA with hundreds of investments or invest in a pre-made Classic or Socially Responsible portfolio. 

IRAs are more flexible and liquid than you might think

Roth IRAs in particular come with a surprising amount of flexibility. If you make direct contributions to a Roth IRA, you can typically withdraw these contributions early, which means before age 59 ½, without paying additional taxes or a penalty (which isn’t the case for a 401(k) or traditional IRA). However, you’ll still owe income tax and a 10% penalty on earnings (or money you earn on your contributions) you take out of your Roth IRA before retirement with a few exceptions. For example, one popular exception allows you to withdraw up to $10,000 in earnings for a first-time home purchase. 

If you have a traditional IRA, you might be able to execute a Roth conversion and benefit from the flexibility that comes with a Roth IRA. If you decide to do this, Itrust offers easy Roth conversions that eliminate the paperwork and hassle. Just keep in mind that you need to wait at least five years after the Roth conversion to be able to withdraw contributions without paying a penalty.

IRAs can often have lower fees than 401(k) plans

At Itrust, we think it’s important to minimize fees. When you invest, you’ll typically pay for what’s known as the expense ratio (the fee charged by an ETF’s issuers to manage the fund) as well as advisory fees. It’s important to keep an eye on the fees you’re paying, because over time they eat into your returns.

Average 401(k) advisory fees are generally between 0.5% and 2%. IRAs, on the other hand, are typically less expensive. Itrust IRAs are subject to our low 0.15% annual advisory fee.

IRA drawbacks

IRAs have low annual contribution limits

One drawback of using IRAs to save for retirement is that the annual contribution limits are relatively low. In 2024, you can contribute up to $23,000 to a 401(k) plan (and up to $23,500 in 2025), but you can only contribute $7,000 to an IRA in 2024 (also $7,000 in 2025) unless you’re at least 50 years old, in which case the limit is $8,000 in 2024 and also $8,000 in 2025. 

IRAs sometimes have early withdrawal penalties

If you have a traditional IRA and withdraw from the account before age 59 ½ , you’ll generally pay a 10% penalty and income tax. There are a few exceptions to this, like if you withdraw up to $10,000 for a qualified first-time home purchase or lose your job and withdraw to pay health insurance premiums, under certain conditions.

As we explained above, Roth IRAs are significantly more flexible when it comes to withdrawing your contributions before retirement—you can typically do this without paying taxes or penalties. But if your early withdrawal exceeds your contributions and you take out earnings, or if you had previously completed a Roth conversion, you may be subject to taxes and a 10% penalty when you file your taxes with the IRS.

Some IRAs have required minimum distributions (RMDs)

If you have a traditional IRA, once you reach age 73 you have to start withdrawing at least a minimum amount of money each year—this is called an RMD. The amount you must withdraw is your account balance at the end of the previous year divided by the “distribution period,” which is based on your age and set by the IRS each year. You can also calculate your RMDs using this tool from investor.gov. Practically speaking, RMDs mean your earnings can’t compound in a traditional IRA indefinitely. This rule doesn’t apply to Roth IRAs, however. If you have a Roth IRA, you typically don’t have to take RMDs during your lifetime unless you inherited the account. 

The bottom line

IRAs can be a powerful tool for building long-term wealth. If you’re thoughtful about your contributions and only invest money you won’t need until retirement, the benefits of these accounts outweigh the drawbacks. 

We know choosing the right IRA can feel tricky, so we developed our IRA calculator to help you determine what kind of account is right for your specific situation. Just enter your filing status, income, and a few other details and we’ll help you figure out the rest. When you’re ready to start saving, Itrust offers traditional and Roth IRAs, as well as SEP IRAs and rollover IRAs so you can save for retirement on your own terms. 

Is a Roth Conversion Right for You?

IRAs, or individual retirement arrangements, are a popular way to save for retirement, and with good reason: IRAs have numerous benefits. You may already be familiar with some of the different types of IRAs, including traditional IRAs and Roth IRAs. But you might not know it’s possible for people who typically don’t qualify for a Roth IRA to convert a traditional IRA into a Roth IRA. Depending on the details, this process is known as a “Roth conversion” or a “backdoor Roth IRA,” and in this post, we’ll walk you through two common scenarios where they’re likely to be beneficial.

IRA basics

First, let’s review a few basics about IRAs. IRAs are retirement accounts you open for yourself, unlike 401(k) plans which are offered through your employer. Roth and traditional IRAs have lower contribution limits than 401(k)s and they tend to have more flexibility around investment options. Here are some highlights at a glance:

  • Traditional IRAs: In general, depending on your income and whether you have a 401(k) plan at work, you get a tax deduction in the year you contribute to a traditional IRA and then pay taxes on withdrawals.
  • Roth IRAs: You don’t get a tax deduction when you contribute to a Roth IRA, but withdrawals after age 59 ½ are tax-free. You can’t contribute directly to a Roth IRA if you earned $161,000 and over as a single filer or $240,000 and over as a married joint filer in 2024, and those numbers rise to $165,000 and $246,000 respectively in 2025.

The tax advantages of both account types can be significant, but the tax-free growth and withdrawals you get with a Roth IRA can be especially powerful. Not everyone is eligible to contribute to a Roth IRA directly, so that’s where Roth conversions come in. A Roth conversion is when you move money from a traditional IRA to a Roth IRA. You might owe taxes in the year of the conversion, depending on whether you have any pre-tax funds in your account, but then your withdrawals from your Roth IRA after age 59 ½  are tax-free.

Let’s look at two instances where a Roth conversion is likely to be beneficial. 

Scenario 1: One-off Roth conversion in a low-earning year

Let’s say you know you’re in an unusually low-earning year. Maybe you’re going to grad school or you’re taking time off to travel. You have an existing traditional IRA with some pre-tax funds in it (either because you rolled over a 401(k) from a previous employer or you contributed to one directly), and since you’re in a lower-than-usual tax bracket, now could be a good time to pay taxes on the conversion and then benefit from the tax-free growth and withdrawals you get with a Roth IRA in the future.

Let’s look at an example of how this might work. Assume your ordinary income tax rate will be 20% this year instead of the 40% it would be in a typical year. You have $10,000 (pre-tax) in a traditional IRA, and you’re wondering if you should execute a Roth conversion. If you were to leave the money in a traditional IRA for 30 years, assuming a 6% return compounded annually, it would be worth $34,460.95 after paying a 40% tax upon withdrawal. However if you converted the account to a Roth IRA, you’d pay $2,000 in taxes now (that’s your 20% current income tax rate multiplied by the value of the account), but the value of the remaining $8,000 compounded at 6% annually over the next 30 years would be worth $45,947.93 after taxes, because you wouldn’t owe any additional taxes upon withdrawal as long as you were at least 59 ½ years old. In other words, converting your traditional IRA in a low-earning year has the potential to give your retirement savings a big boost.

Scenario 2: Backdoor Roth to save more for retirement

Let’s assume you earn too much to contribute directly to a Roth IRA and you aren’t eligible to deduct contributions to a traditional IRA (either because your income is too high or because you have a 401(k) plan at work), but you still want to save some additional money for retirement. Assuming you don’t have any pre-tax money in a traditional IRA and don’t anticipate needing the funds within five years, you’re likely to benefit from a type of Roth conversion known as a “backdoor Roth.” 

Again, let us explain with an example. If you fit the description above, you can either invest by opening a taxable investment account or making a non-deductible contribution to a traditional IRA. If you invest $7,000 in a taxable investment account at a 6% return compounded annually over 30 years, ignoring the taxes you’d have to pay on dividends and the gains associated with account rebalancing, your account would be worth $40,204.44 at retirement, but you’d still owe capital gains taxes when you sell to withdraw. If your capital gains tax rate in retirement were 15% then that account would only be worth $35,223.77 after taxes. However if you contributed $7,000 (after-tax) to a traditional IRA (this is the contribution limit for 2024 and 2025 if you are under 50) instead and converted to a Roth IRA, your account would be worth $40,204.44 at withdrawal because you would owe no taxes on the sales (again, assuming you were at least 59 ½ at the time). 

When a Roth conversion isn’t right for you

If you’re still unsure, here are two signs that a Roth conversion probably isn’t right for you:

  • You plan to retire within five years. You have to wait at least five years to withdraw earnings from a Roth IRA with no penalty, even if you are 59 ½ years old (the typical age at which you can start taking withdrawals with no penalties). 
  • You don’t have enough cash on hand to pay taxes on the conversion. These taxes could be significant if you have a lot of pre-tax money in a traditional IRA. You can estimate them by multiplying the amount of pre-tax money in your traditional IRA by whatever you expect your marginal tax rate to be.

Automation makes it easy

Typically, the Roth conversion process involves a bunch of paperwork. But at Itrust, we’ve automated the process so you can convert an Itrust SEP or traditional IRA to a Roth IRA with just a few taps on your phone. Automated Roth conversions are just one of the many tax-minimization features we offer you at no additional cost, including:

  • Tax-Loss Harvesting, both at the ETF level and the individual stock level
  • Tax-minimized withdrawals
  • Tax-minimized brokerage transfer
  • Tax-sensitive rebalancing 

At Itrust, we want to help you build long-term wealth so you can meet your financial goals (like retirement!) with confidence. We hope the information in this post helps you make an informed decision about Roth conversions. For even more help planning for retirement, check out our IRA calculator.