Even the best investors can’t always predict market downturns — who are we kidding, no one can! If you have significant invested assets, market declines can jeopardize your hard-earned wealth. While the stock market usually rebounds in time, market downturns can be especially scary for individuals.
That said, a market downturn doesn’t mean you should get out of the stock market as fast as you can. On the contrary, bear markets are an excellent opportunity to flex specific financial muscles.
Younger investors could actually benefit from increasing investments during market downturns as the added capital could improve their long-term prospects. Other financial moves to consider include rebalancing your portfolio, converting funds to your Roth IRA, and conducting tax loss harvesting.
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Sure, markets have been on a record-setting run lately, but that won’t go on forever. So, it’s good to be prepared with a gameplan to prosper in the bad times as well as the good.
Key Takeaways
- While market downturns are an unwelcome development for many investors, there are still smart financial decisions you can make to help weather the storm.
- Different strategies may be available to you depending on your age, asset allocation and proximity to retirement.
- Investing strategies during market downturns include rebalancing your portfolio, converting your traditional IRA to a Roth, and adjusting your gifting plans.
Before you continue reading, grab this free workflow: What Issues Should I Consider When Reviewing My Investments?
How to Take Advantage of Market Declines
Here are some investing strategies to keep in mind during market downturns.
1. Increase Your Contributions
While it may seem counterintuitive to increase your retirement savings when the market is down, it can be a worthwhile strategy, especially for younger investors. By buying when the market is down, investors can take advantage of stock market rebounds in the future. Boosting contributions is an incredibly valuable strategy if you’re able to score a matching contribution from your employer since you’ll be able to take advantage of double the growth.
2. Rebalance Your Portfolio
Market downturns are also a good time to rebalance your portfolio. If you’re nearing retirement, you might want to transfer more of your assets to risk-averse investments, such as bonds and CDs. On the other hand, young investors might want to take advantage of the downturn by investing more heavily in the stock market. It’s always a good idea to have a balanced portfolio with a mix of assets to diversify your investments and mitigate risk.
3. Roth Conversions
Roth IRA conversions are a great way to transfer money from a traditional taxable IRA to a tax-free Roth IRA. However, when you complete this conversion under normal market conditions, you’re typically on the hook for a significant amount of taxes on your investments.
You can save money on a Roth conversion by completing it during a market downturn. Because the value of your investments is lower during a decline in the market, you’ll pay a smaller amount of taxes when you make the conversion. It’s also a good strategy if your income is lower than it usually is in a given year.
Depending on your 401(k)/403(b) plan rules, you may be able to complete this same strategy inside of your qualified plan(s) as well.
4. Tax Loss Harvesting
Tax loss harvesting is the process of selling investments at a loss to write them off on your taxes. If you’re interested in reducing your tax burden for the year, capital loss harvesting is a strategy worth considering.
Tax loss harvesting only works with investments where you’ve experienced a loss. While you can buy back investments after selling them, you must wait at least 31 days to avoid violating the wash sale rule.
5. Gifting
Suppose you plan on gifting assets to friends or family members. In that case, you may want to consider giving during a market downturn — when assets have lower values — if you believe that the property will appreciate in the future. Strategically planning your giving allows you to shift more property at lower values to loved ones like children and grandchildren.
6. Make Sure Your Goals are on Track
Tired of stressing over the red dots in your portfolio? Shift your attention elsewhere. Market downturns present an opportunity to check in on your goals. Depending on your particular situation, your investment portfolio’s goals, time horizon and objectives may need to be reviewed, updated or documented. Tracking your goals is especially important if you’re nearing retirement or have a significant expense on the horizon you plan to use your investments to cover, like tuition for your kid’s school.
Take Advantage of Investment Opportunities in Any Market Condition
Frustrating as it may be, market downturns are an inevitable part of investing. While they can be a little nerve-wracking at times, it’s important to remember that, on average, your investments will likely still experience growth over time.
It’s essential to capitalize on critical investment opportunities, whether you’re riding the highs of a bull market or treading water in a bear market.
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
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