Most people understand the value of maintaining a long-term outlook when it comes to their investment strategy. Amid ongoing market swings, however, it can feel difficult to stay the course. Despite the uncertainty, it’s important to remain focused on the big picture to help manage the effect that emotional selling may have on your overall financial plans. In fact, market downturns may even present portfolio and planning opportunities that may not seem obvious at first. With that in mind, here are six opportunities you may want to consider to help weather current market volatility.
1. Take Advantage of Tax-Loss Harvesting
If you have a comprehensive financial plan in place, you shouldn’t have to sell stocks (especially at a loss) to cover living expenses. But you may want to sell them anyway to take advantage of a strategy called tax-loss harvesting.
Tax-loss harvesting is the practice of proactively using investment losses to offset capital gains, to potentially reduce or avoid capital gains taxes—now or in the future. In essence, it involves selling Security A at a loss to offset the capital gains tax liability on Security B, helping to lower your personal taxes, assuming the sales meet certain conditions.
While this strategy cannot restore losses, it can help mitigate them by taking a tax-aware approach. That said, its effectiveness can vary depending on the composition of your portfolio.
2. Rebalance Your Portfolio
A balanced portfolio is one that has an appropriate mix of historically steady and volatile assets, sectors, styles, and geographies. All these inputs tend to move up or down at different rates and respond differently to changing economic conditions. The shorter the timeframe, the less predictable those relationships are, so it follows that more extreme and volatile market moves can present greater opportunities to rebalance your exposures.
For example, in March 2020, after stocks had dropped far faster than bonds, a typical, 60/40 portfolio (a portfolio with 60% of investments in stocks and 40% in bonds) began to look more like 50/50. This presented an opportunity for disciplined, long-term investors to sell bonds, buy cheaper stocks, and efficiently restore the balance of risks needed to help drive a successful retirement plan.
Notably, the opportunities extend beyond simple stock and bond allocation. You can also dig deeper to rebalance the kinds of stocks you have, the sectors you own, and the geographies you are exposed to. Keep in mind that globally diversified portfolios can also benefit from periodic rebalancing as fluctuations among currencies, growth rates, and commodities markets often present opportunities.
Overall, as market performance fluctuates, so will the value of your investments. Amid prolonged market downturns, you could be exposing yourself to unnecessary risk. Now could be the time to reevaluate your situation to help make sure your portfolio is properly balanced to suit your goals and needs.
3. Utilize Dollar-Cost Averaging (DCA)
Dollar-cost averaging is an investment strategy in which you invest the same amount of money into your portfolio each month or each quarter with the aim of avoiding behavioral biases by consistently buying assets at prevailing prices. In so doing, you are theoretically more likely to end up with a higher overall return on those investments.
People like to buy things on sale. Shouldn’t this approach apply to stocks and bonds when they periodically, and inevitably, trade at steep discounts? Younger investors with long time horizons can potentially benefit meaningfully when they fund their long-term retirement plans through a DCA strategy. This type of disciplined approach can help smooth out price fluctuations by positioning you to buy more when market prices are lower and less when market prices rise. This helps to “average out” the price you pay for your assets, positioning you to potentially realize higher gains over time.
4. Consider a Roth Conversion
A Roth conversion involves moving money from a traditional individual retirement account (IRA) or qualified employer-sponsored retirement plan into a Roth IRA. The benefit of having a Roth IRA is that assets inside the account can potentially grow tax-free.
Additionally, qualified distributions (which are those taken after the age of 59½ and once the earnings have been in the account for at least five years) are tax-free.
When executing a Roth conversion, the converted amount is treated as ordinary income for tax purposes, which may attract a large tax bill in the year of conversion. However, converting during a market decline may reduce the market value of the assets you convert—helping reduce your taxes owing in the process. Meanwhile, you set the stage for future tax-free growth as well as tax-free qualified withdrawals. Additionally, there is no need to take required minimum distributions (RMDs) with a Roth IRA, which may help you better manage your tax liabilities during retirement.
That said, traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA. Investing involves risk, including possible loss of principal.
5. Reevaluate Account Contributions
When markets are underperforming, it’s a great time to reevaluate your retirement account contributions. How much are you contributing to each account and how often?
If you’re making regular contributions, you are already taking advantage of the DCA strategy, but are there adjustments you may want to make in a down market? For instance, if you can afford it, you may want to consider buying more assets while they are “on sale,” positioning yourself for greater potential returns on the upside.
6. Think About Gifting to Your Family
Market downturns can be advantageous for gifting. If you have assets you plan on leaving to your family after you pass away, it may make more sense for you to gift those assets now while their fair market value (FMV) is lower, because when the value of the asset goes down, so does the possible gift tax due.
There are several ways to transfer wealth to your family to lower taxes, but gifting assets in this way also leaves the opportunity for them to appreciate outside of your estate, benefiting your family by potentially mitigating estate taxes after you pass.
Bottom Line
While market volatility can be unsettling, it can also open the door to many planning opportunities. Reach out to an advisor today to explore the strategies that might be right for you when weathering market downturns.
The opinions voiced in this material are for general information only, are subject to change at any time without notice, and are not intended to provide specific investment advice to any individual. Any economic forecasts presented herein may not develop as predicted and there can be no guarantee that any strategies promoted will be successful. Investing involves risk, including the possible loss of principal.
The opinions voiced in this material are for general information only, are subject to change at any time without notice, and are not intended to provide specific investment advice to any individual. Any economic forecasts presented herein may not develop as predicted and there can be no guarantee that any strategies promoted will be successful. Investing involves risk, including the possible loss of principal.
This information is not intended as a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.
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