Market Down? Make Lemonade With Lemons
Gabe Fransen | July 6, 2022
Being invested in the stock market brings risk and volatility to your portfolio of assets. They say the higher the risk, the higher the reward over long periods of time, but when we are in a period of market decline, it can sometimes be hard to remember that. Markets move down and up and up and down for a plethora of reasons, how we respond while on the roller coaster of a ride will likely determine if the stock market has treated you well or not.
We all know the saying of buy low and sell high, but if we decide to sell out of fear because the market has dropped 20%, we are breaking that rule and selling low. If we decide to buy because the market is on fire and has rallied for a couple weeks, we are breaking the rule and buying high. Those that have a plan and stick to the plan and don’t make emotional or reactionary decisions typically come out on top.
There are some financial planning opportunities that make themselves available to investors in a down market.
- Tax Loss Harvesting
- Simply put, if an asset is sold for less than it was purchased for, the result is a capital loss and can be used to offset other capital gains and could be a beneficial tax savings tool
- If there are more capital losses than gains, $3K can be used to offset ordinary income and then cary over the rest to future years
- Buy Low
- If there are liquid assets sitting on the sidelines that don’t have a purpose or timeline attached to them, buying at a discount could be a great use of that lazy money
- Be willing to take on some risk and volatility so that you are not tempted to sell even lower
- Roth Conversions
- We believe that Roth Conversions are a terrific financial planning tool as discussed in our “When is a good time to convert from an IRA to a Roth?” article.
- Doing Roth Conversions in a down market could magnify the impact of that, take the following two examples as a comparison
- Roth Convert $100,000 of hypothetical stock “xyz” from a pre-tax IRA to a Roth IRA on Jan 1, 2022 assuming the stock is $10 per share at the time of conversion, meaning 1,000 shares are converted from the IRA to the Roth IRA. If the stock goes to $20 per share in 10 years, the Roth is now $200,000
- Roth Convert $100,000 of hypothetical stock “xyz” from a pre-tax IRA to a Roth IRA on July 1, 2022 assuming the stock is $5 per share at the time of conversion, meaning 2,000 shares are converted from the IRA to the Roth IRA. If the same stock goes to $20 per share in 10 years, the Roth is now $400,000
- By converting investments at depressed prices, you are able to make a greater impact at lowering your future tax bill for less dollars today
- Rebalancing of Portfolio’s
- We like the saying, “All ships sink with the tide”. The market often overreacts and savvy money managers can take advantage of positions that have been oversold in a down market, allowing for the potential of a quicker recovery when the market turns up
Down markets will happen, investors should have a planned response to take advantage of the opportunity this brings.