Exploring Your Opportunities in a Down Market
When it comes to investing, very rarely do we get clear skies. There are the inevitable bumps along the way that we must endure and constant threats to look out for.
Watching your accounts go down is not only uncomfortable and painful, but it can also cause investors to make mistakes. It’s understandable that some investors want to cash out and get out of the stock market entirely.
But, often times, it’s about avoiding unforced errors and not making that big mistake that completely erodes your financial picture.
So, rather than calling it quits all together when we face market declines, let’s explore some opportunities that do arise within every market pullback:
Roth Conversions: Market downturns present the opportunity to convert some (or all) of your Traditional IRA into a Roth IRA. This can be a great way to take advantage of the lower market prices by converting more shares thus increasing tax-free growth potential. The idea would be to pay the taxes now (ideally with excess cash in your savings) to then enjoy the future tax-free growth in your Roth account. Don’t forget about back door Roth conversion either.
Tax Loss Harvesting: One of the more difficult decisions when investing is when do you ultimately sell your assets. It’s never ideal to sell your investments at a loss and sometimes we are emotionally attached to these investments. How can I sell my baby??! However, this strategy of tax loss harvesting can help reduce the amount of capital gains tax you owe, or can potentially decrease your ordinary income. You can sell your investments that are down and reinvesting the proceeds in similar investments. This could lower your tax bill and allow you to keep more money invested. Also, be mindful of the wash sale rules.
Rebalancing: When constructing your portfolios, we identify an asset allocation mix that aligns with your goals and values. During market pullbacks, the price movements can cause your portfolio to drift away from this target allocation. We can use the volatility to reduce the assets that have increased in value and redeploy those proceeds into the lagging assets. This has the potential to reduce risk, realign your portfolio to the planned asset allocation mix and increase returns within the portfolio.
Change Your Allocation, Add More Equities: Another opportunity to potentially increase future returns is to review your mix between equities and fixed income. Increasing your exposure to equities while the market is down can be a great way to buy low and sell high.
Or if these type of downturns cause you to lose sleep and have anxiety, than it could be a great time to reduce your overall risk tolerance.
Make Retirement Plan & IRA Contributions: For those still accumulating money in their 401k’s each payroll, volatility works in your favor. You are systematically buying into your funds through market ups and most importantly, through market downs. This means that you buy more of your funds when markets are low. This alone may be the simplest investment mantra: BUY LOW.
Review Your Spending Plan: If you are retired and withdrawing funds from your portfolio, now is a good time to review your spending plan. Take the time to update your savings plan and consider your cash reserves and debt management strategy. Determine if some discretionary spending could be delayed our cut, if necessary.
Cash on the Sidelines: Those with excess cash in their savings or investment portfolios should consider adding those funds while the market is down. Or, in a rising rate environment, explore high-yield savings accounts and Series I Savings Bonds.
Every investing journey is unique and specific to that individual investor. But even amidst market pullbacks, investors can uncover opportunities that will improve their financial picture.
You make the most money during down markets, you just might not realize it at the time.
Disclosure: This material is for general information only and is not intended to provide specific advice or recommendations for any individual.