When markets decline many people panic and try to pivot their investment plan when a wise thing to do is nothing. Market declines and corrections are normal stock market behavior. That doesn’t mean there aren’t strategic things you can do during a market decline. Discover the different ways we can manage your finances during a market decline:
Tax loss harvesting is selling an investment with a loss. The loss can soak up realized gains, as if it were a sponge. You can potentially reduce your taxes on the capital gain. You also can proactively realize losses if you intend to generate gains elsewhere in that same calendar year.
Example: If you were selling company stock and the sale would result in a taxable gain, then realizing the losses now would help offset that gain from the sale of the company stock. While you can buy back the security you sold, you will need to wait 31 days before and after the sale to avoid violating the IRS wash sale rule.
A ROTH conversion is moving assets from a regular IRA, SEP, or 401k into a tax-free ROTH IRA or ROTH 401k. When you withdraw funds from the regular IRA/401k, you are required to pay ordinary income tax. The benefit of a ROTH is that the assets can grow tax-free. Why consider a ROTH conversion during a market decline? The value of your investments has declined, so you can convert more shares at a lower market value. Depending on your income situation, a declining market may put you in a lower income tax bracket, give you the chance to take advantage of your conversion income.
During a large market decline there is a likelihood that your portfolio allocation will look different from your initial intended allocation. This happens because investments will react differently from one another, some declining faster than others. This is a great time to revisit your portfolio and compare it to your initial allocation. If your portfolio has shifted, we can work with you to buy and sell assets to get it back to your intended mixture. This helps ensure that your portfolio is in line with your diversification and risk plans.
Ideally your financial plan allows you to continually save towards your financial goals. This may happen with recurring contributions to your 401k, IRA, or taxable portfolio. When markets decline, ask yourself if you can increase your savings into some or all of these accounts? While it may seem counterintuitive to buy when the market is down, you can take advantage of any future rebounds in the stock market. If your employer matches 401k contributions, you will also benefit from a large employer match.
If you have a large, concentrated exposure to a single stock, but have been hesitant to sell and diversify because of taxes, a market decline may be a wise time to reassess. A decline in stock price means a decline in capital gains and the associated taxes. You may want to consider selling depending on how much the stock has declined. If you are tax-loss harvesting elsewhere in your portfolio, you may want to offset some/all of your associated gains from the sale of your concentrated stock.
Consider gifting shares, either directly to individuals or into an irrevocable trust when the market value is low. If you still like the investment and believe it will recover, moving it out of your estate when the value is low is one way to transfer more shares at a lower tax cost.
While the value of your investments might fall during a market decline, historically the markets bounce back over time, resulting in potentially greater gains for investors. Reach out to our team for more financial strategies and support, unusual tax rules may apply.
We believe that to properly manage your assets, we need to have a complete picture of who you are and what you hope to achieve.