12 Sep Turning a Down Market into an Opportunity
Asset prices are significantly down from recent highs. While looking at retirement or other investment account statements may not be the gratifying experience of last year, there are tactical strategies investors can employ to take advantage of the drop in asset prices.
Reap the Tax-Loss Harvest
The current market presents an opportunity to sell depreciated assets and use the loss to offset the capital gains taxes on other assets. The TLH strategy involves replacing investment positions at a temporary loss with other holdings, then reversing everything after 31 days.
This sequence enables the investor to capture tax losses which can directly reduce future tax bills. The strategy is helpful because you can get the tax advantages of TLH while remaining fully invested.
Even if you don’t have offsetting capital gains, tax-loss harvesting can still be beneficial. You can use up to $3,000 of capital losses to offset your current ordinary income. You can also carry the loss forward, offsetting $3,000 annually until the amount of the loss is exhausted.
Please note that many intricacies in the TLH process could cause tax ramifications. Consult with a financial advisor to implement the TLH strategy.
Rebalance Your Portfolio
It can be challenging to sit through a bear market and just watch your portfolio, but a quote we often repeat during times like these is, “If your goals haven’t changed, your portfolio probably shouldn’t change either.”
Review your short- and long-term goals to be sure that your investment plan doesn’t need tweaking. Just because your accounts are temporarily down by -20% does not mean it’s the wrong mix for you. Once you’ve determined whether your portfolio is still the right fit, you can rebalance your portfolio back in line with your preferred risk parameters and market views by adjusting the weightings of each asset class or security. In some circumstances, you may be buying more stocks at a low price, which may enhance your return in the future.
Speed up Your Contributions
Investing when asset prices are lower makes sense, particularly if you have a long-term perspective. Even though it may feel like a “risky” time to be investing, stocks are, comparatively, “on-sale” from recent highs, and we know from history that bear markets have been temporary speed bumps along the ride of the market’s compounding advance upward.
When stocks go down, the future expected return typically increases. Therefore, bear markets could be an opportune time to make lump-sum contributions of extra cash or accelerate your annual IRA, 529, or other investment account contribution.
The Roth Conversion Is More Attractive
A Roth conversion is the process of transferring, or “converting,” your traditional pre-tax retirement funds to Roth funds. This is a common retirement & tax planning strategy because even though you owe income tax on the amount you convert, Roth funds grow tax-free, the future distributions can be tax-free, and Roth accounts are not subject to Required Minimum Distribution (RMD) rules.
Bear markets could be a good time to execute a Roth conversion. Since your account value is suppressed from recent levels, a $50,000 conversion (for example) will represent a more significant percentage of your account balance than 12 months ago. You get to convert a more considerable portion of your account and enjoy those higher future expected returns we mentioned earlier.
The degree to which a Roth conversion makes sense is very personal to your situation, so it’s a good idea to consult your advisor and CPA about the potential tax and portfolio impact.
The Bottom Line
After a long bull market, getting used to the new reality of volatility and lower asset prices can be difficult. But changing your perspective to proactively look for ways to make the most of our current market environment can help you ride out the discomfort more effectively and help keep your plan on track.
The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable, but is not guaranteed or warranted by Mercer Advisors. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation. All investing involves risk, including the possible loss of principal.
Investment advisory services offered through HCO Private Wealth. HCO Private Wealth and Harrison & Company Wealth Management are tradenames owned by Mercer Global Advisors Inc. (“Mercer Advisors”), an SEC registered investment adviser principally located in Denver, Colorado, with various branch offices throughout the United States.