Market Downturn Toolkit
We often get asked the question, “what do I do when the markets are down?” While the simple answer may just be to do nothing, there are several techniques that one can employ that will help you come out on the other side of the downturn in a better position than before. Several of these techniques have long been methods for building wealth.
When we often instruct clients to leave their portfolios untouched during market corrections, that advice is purposeful. At its basic level, it means nothing more than choosing to focus on the things we can control. At no point should that level of control involve guessing what the market will do next. Instead, we rely on historical trends and data to support the notion that patience rewards long-term investors and market timing is rife with disappointing results.
So what else can we do to further our cause to grow and protect wealth and ultimately help us reach our goals? Here are just a few of the important opportunities that can be employed during a down market:
Continue to fund and look for ways to increase your contributions to your company retirement plan. There’s often an interesting behavioral trick at play when the market is down. We look at our 401(k) balance and realize something… the downturn doesn’t “seem” so bad. That’s simply because during the downturn you probably were and should continue to contribute to the account. These added contributions not only trick our brain into thinking your retirement plan is holding up quite well, but they allow you to dollar-cost-average into the market at lower prices (i.e., buying more shares at a discounted price), which when compounded over time will undoubtedly benefit your retirement plan balance.
Rebalance your portfolio. Rebalancing your portfolio takes the guesswork out of “buying low and selling high.” It allows you to reallocate your portfolio back to its original stated purpose and thus bring it back in line with the portfolio you developed when you sat down and really considered how much risk you’d be comfortable with. In actual terms, rebalancing allows you to purchase those investments in your portfolio that have been sold (buy low) and selling shares of investments that have become too expensive (sell high). In market downturns, this often involves selling some bonds and purchasing stocks.
Harvest losses within taxable accounts. Coupled with a sound rebalancing strategy, one of the toughest challenges in managing a taxable investment portfolio (your non-retirement assets), is dealing with the tax issues. We often hold onto stocks and other positions despite their prospects simply because selling would cause a huge tax problem (yes, even at favorable capital gains rates). When markets decline, this gives us an opportunity to book some of those losses to use to your advantage come tax season. In addition, it could allow the option to sell or reduce a position when the taxable gain has now been lowered to a more feasible level. We often will harvest losses to be used later in the year to offset other gains elsewhere, or simply to reduce your adjusted gross income (AGI).
Consider the gift of higher education. Market downturns are a wonderful opportunity to make contributions for the benefit of a future college-bound child or loved one in 529 accounts. Those gains will grow tax-deferred and when used for qualified education expenses, avoid taxes altogether. For wealthier Americans, this is a wonderful strategy to move money out of their taxable gross estate, especially if they are taking advantage of the ability to front-load five years’ worth of contributions to a child, grandchild, niece, nephew, etc.
Convert a Traditional or Rollover IRA to a Roth IRA. For those who are unfamiliar, the IRS allows you to take traditional IRA funds and convert them to Roth IRA assets, which allows you to take advantage of the Roth’s tax-free benefit when the fund’s earnings are withdrawn during retirement. Here’s the catch: for the amount you converted that was previously considered pre-tax savings (e.g., traditional IRA assets from a rollover of a company retirement plan or deductible IRA contributions), you will need to pay taxes on this money at ordinary income rates. In a down market, this is a great opportunity to convert an account with a smaller tax burden than before. Please discuss the feasibility of this strategy in detail and in coordination with your tax professional.
Special thanks to our colleague Michael Bukowski, CFP® at Main Street Financial Solutions for the input on this article.
GENCapital provides objective, transparent, and knowledgeable financial advice because it’s the right thing to do. GENCapital is a Fiduciary, which means we are obligated to always put our clients’ interests ahead of our own. We are advice-based, client-centric advisors who prefer to sit on the same side of the table with you as a valued customer. With a concierge approach, extensive resources and generations of experience, we go beyond traditional investment strategies and partner with you to deliver a plan customized to your goals. Based in Atlanta, Georgia, our team of qualified and reliable professionals is committed to developing long-term relationships and building your wealth for generations.
GENCapital is a wealth management firm offering investment management, financial planning and business advisory services for individuals, families and organizations. With a concierge approach, extensive resources and generations of experience, we go beyond traditional investment strategies and partner with you to deliver a plan customized to your goals. Based in Atlanta, Georgia, our team of qualified and reliable professionals is committed to developing long-term relationships and building your wealth for generations.
For more information, contact us.