To say the stock market has been on a wild ride the past couple of months would be an understatement. We can attribute it to the economic impact of the coronavirus, but the dust hasn't settled yet. Until we know more, much of what happens in the market on a daily basis is based on investor sentiment toward news headlines. We may not know the real economic damage for a long time. For the individual investor, it can be difficult to know what to do during these turbulent times.
First, for long-term investors with a well-constructed, risk-managed portfolio, a down market has been accounted for in the financial planning process and shouldn’t derail the financial plan. This is why you hire a reputable financial advisor to begin with, to help you prepare for times like this. A financial advisor can’t prevent near-term market losses, but they can mitigate an otherwise disastrous situation by keeping you on track towards your financial goals.
The silver lining is that there are several opportunities in a down market that may or may not be applicable to your situation. You’ll want to talk to your advisor to see if these might benefit you:
1) Put more money in
We can’t time the market, but consider adding money to your portfolio through dollar cost averaging. Dollar cost averaging means you invest a predetermined dollar amount in consistent, regular intervals. That way you can take advantage of the discounted market while its down.
2) Buy or refinance a mortgage
Mortgage interest rates are at historic lows and it is an opportune time to buy and lock it in. If you already own a home and plan on staying for at least 5 more years, it could be worth refinancing depending on your current interest rate.
3) Tax-Loss Harvesting
When your investments are down, a common strategy in the finance world is to sell at a loss and buy a similar investment. This way you can take an investment loss for tax purposes, while still maintaining a similar position to benefit from a future market recovery. You have to be careful with this strategy because there is the “wash rule” which means that two investments can’t be TOO similar. In other words, don’t try this at home. Have a tax or investment professional help you.
4) Convert to a Roth IRA
It is an opportune time to convert a Traditional IRA to a Roth. Quick review, Roth IRA distributions are not taxed, Traditional IRAs are. You will have to pay taxes to convert the Traditional to a Roth, but you might as well bite that bullet now while the Traditional IRA balance is down. After all, if the Traditional IRA was worth $500,000 a few months ago, and now it is worth $400,000, that’s $100,000 that you don’t have to pay taxes on in a conversion. Score!
These are just a few ways to take advantage of a down market. This is a difficult time for many Americans, but focusing on the silver lining can really help us as we get through it together. Let us know if we can help implement any of these strategies.