A bear market is typically defined by a market that is down 20% or more from recent highs. As I write this, we are in a bear market, with the S&P 500 index down over 21% and the NASDAQ down over 28%.1
No one likes losing money – but you need to remember that, in all likelihood, this is just a temporary market decline, and that the broader market has always recovered. That is not a guarantee that the market will recover now or in the future – but rather a simple observation that, in history, it always has recovered.
It is also very important to note that this does not necessarily apply to individual equities – as many individual COMPANIES have never recovered, have gone bankrupt and ceased to exist throughout history.
So given the lessons history has taught us, and the great likelihood that the broader stock market will rebound this time too and hit new highs in the future – we SHOULD be asking: How can we make the most of this current opportunity?
We have some suggestions:
- Consider converting traditional IRA monies to a ROTH IRA. This is a taxable event – but with the expectation that the market will recover at some point in the future – it would be better to have that recovery happen in a more tax advantaged account like a ROTH IRA. Monies held in the ROTH have already been taxed – and won’t be taxed again. So consider this bear market as an opportunity to:
- stuff some additional funds into your ROTH IRA through a conversion,
- pay less in tax than you would normally pay if you converted the same number of shares when the market was higher,
- have your investments recover in the most tax advantaged account you own,
- and pay no additional taxes on the gains of the funds held within your ROTH IRA.
- Portfolio re-allocation. Re-allocating a portfolio in a down market to have a greater percentage of assets invested into equities as opposed to bonds should allow the portfolio to recover any losses more quickly during a market rebound than the portfolio would do so otherwise with the existing, less aggressive allocation. A portfolio comprised of a greater percentage of stocks should also offer more growth potential for the funds over the long-term. A more aggressive portfolio would only be appropriate for a person having a risk tolerance that would indicate they could endure the additional volatility. However, the time to take more risk is when the market is down – not when the market is up!
- DCA new money into equities (stock funds). Surplus cash & funds not needed in the foreseeable future could be better invested it into stock funds now that the market is down, as opposed to when it is higher. Additionally, retirement plan participants should consider increasing contributions into retirement plans – if they are not already “maxing out” (contributing the maximum allowed by law) their plans. The market is on sale right now. It is better to buy stock funds when they are on sale as opposed to when they are expensive! So, consider stocking up… on stock funds!
- Tax-Loss Harvesting. Selling positions in a taxable brokerage account that show an unrealized loss converts that loss to a realized loss. This allows the account holder to capture a potential tax deduction on their income taxes. These capital losses can offset any gains from future sales or capital gains distributions paid out towards the year-end. If the account holder doesn’t have any gains to offset, they may be able to deduct up to $3,000 against ordinary income each tax year until the loss is used up2. The funds may be used to purchase a similar (but different) investment immediately, or the same investment – after waiting for 30 days – to prevent running afoul of the wash-sale rules3. Confirm these rules and seek the input of your tax advisor for your specific situation.
- Reduce current distributions. One of the best ways to stem the bleeding in investment accounts is to reduce current distributions. This allows more money to remain invested in the account, and it is therefore easier to recover any loses when the market resumes its upwards trend. People who have built some flexibility into their financial plan might have other places where they could pull some cash – such as a life insurance policy, their 401(k) or a home equity line of credit – if they absolutely must have that cash.
Sincerely,
- June 3oth, 2022 Yahoo Finance
- Topic No. 409 Capital Gains and Losses | Internal Revenue Service (irs.gov)
- Publication 550 (2021), Investment Income and Expenses | Internal Revenue Service (irs.gov)
Provided content is for overview and informational purposes only and is not intended and should not be relied upon as individualized tax, legal, fiduciary, or investment advice. These concepts were derived under current laws and regulations. Changes in the law or regulations may affect the information provided. This information is not intended to be used – and cannot be used – to avoid penalties under the Internal Revenue Code. For answers to specific questions and before making any decisions, please consult a qualified attorney or tax advisor.
