Stock Market Sale!
If you’re someone who watches your investments closely, these past several weeks have probably felt like a rollercoaster. And even if you aren’t logging into your 401k everyday, online news outlets and TV personalities are letting you know that things are a bit hairy in the stock, bond, and even crypto markets. Some may even try to instill fear or impending doom. They might say, “it’s different this time.” Well, it’s not. Perhaps the circumstances (see: inflation, war, pandemic) are something we haven’t seen in decades or in some of our lifetimes, they are still naturally occurring events and will undoubtedly affect the economy and ultimately, our investments. Historically, these events tend to be short-term and more importantly, beyond our control. We have been through economic crises before. Most recently, the 2008 financial crisis and just prior to that, the 2000 tech boom/bust.
In the midst of any panic, chaos, or possible recession, it’s important to stay focused on your goals, particularly if you are investing for the long-term, such as for retirement or a child’s college education. Below are some things to consider doing while in the midst of a stock market downturn.
If you are in a position to do so, now is not the time to stop contributing to your 401k, IRA, or other retirement account. Companies are essentially on sale right now. Just as you wouldn’t go to a clothing store and buy a shirt from the full price rack when you are able to get the same shirt for 20% off next door.
Convert Pre-Tax Accounts to Roth
While Roth conversions can be a great idea when you are in a lower tax bracket, they are also good to do when your account is lower in value. You are theoretically paying tax on a smaller amount and when those assets recover, you can withdraw them tax-free! This strategy requires tax planning and eliciting the help from a professional, such as a CPA.
Rebalancing is ensuring your portfolio remains in its intended allocation. When the stock market goes significantly up or down, you may wind up with more or less in stocks, for example, than what you originally intended. Selling off the better performing assets and buying the under performing are an easy way to ensure you are selling high and buying low.
Put Excess Cash to Use
Got some money burning a hole in your pocket? If you have been eyeing a particular stock or other investment, now may be a good time to purchase it or consider increasing contributions to your retirement plan. Keep in mind, each year you will pay taxes on any capital gains or dividends paid out within a taxable account.
Take a Tax Loss
This one also requires some planning. If you have investments in a taxable account that have lost value and you are looking for ways to save on taxes this tax year, selling some of your “losers,” could offset the additional income tax. Again, please consult a professional and ensure you understand your capital gains tax rates.
Re-Evaluate your Risk Tolerance
If you are someone who thought you could handle a market downturn, but instead find yourself glued to the news and nervously wanting to sell, sell, sell, perhaps you need to re-evaluate your tolerance for risk. There is a difference between having a high risk capacity (long time frame before you need the money) and a high risk tolerance (understand the inherent risks with investing and okay with the ups and downs). The second one is pretty important. If you cannot sleep at night, maybe taking some risk off the table is a good idea.
To sum up the importance of staying the course during market downturns, according to officialdata.org, from the beginning of 2001 until the end of 2021, the S&P 500 generated a total annual return of 8.06% (includes reinvesting dividends). The total return over this period was 409.13%, which means that a $10,000 investment would have become $50,913.05! Of course, there are no guarantees, but in this instance we can see how patience would have paid off.
It’s completely understandable to be a little worried or concerned about the economy. There is plenty of information out there validating your feelings. However, the good news is, there are plenty of ways to take advantage of the current market conditions. The economy is not something the average consumer can control, so it’s important to first understand that point, and second, put the information to better use. Most of the suggestions above require some planning either with a tax or financial professional and depending on your situation, not all of them may be applicable. A professional can speak specifically to your situation and ideally explain what is happening in the markets (and why) to help ease your fears.