The market dropped – what to do now?
If you haven’t heard, the market is down. And when I say “market,” you can almost take your pick: stock market, bond market, cryptocurrency market – they have all been whacked. About the only things that have held up relatively well is real estate, energy company stocks and cash.
The start to 2022 has been discouraging.
But as an investor, you don’t simply have to sit idly by and watch losses stack up. There are plenty of helpful actions you can take in times like these. I can think of five. Let’s explore them.
First, a little perspective. The U.S. stock market is down 22.3 percent for 2022, as of last Friday, and the U.S. bond market is down 11.5 percent. Usually, when stocks are beaten up like they have been this year, bonds have either held their value or even increased in value. Not so much in 2022.
So, how can you make lemonade out of this lemon of a year?
The first thing to consider is redeploying cash to buy more investments. That’s right. Take cash, which has performed relatively well this year, and purchase stocks and bonds, which have performed quite poorly. You have probably heard the saying, “Buy low; sell high.” Buying stocks after they have fallen 22.5 percent certainly fits that bill.
But I’m sure some may be thinking, “What if the market gets worse from here? It looks like the economy is headed for a recession. Is now really a good time to invest?”
The answer certainly depends on your time horizon, but for anyone who can wait five to ten years before needing the money, I think the answer is, “Yes, now is a good time.”
Could stocks fall further from these levels? Absolutely. If you invest now, could you be looking at additional losses in six months or a year? Absolutely. But the longer your holding period, the better your odds of coming out on top.
So, what if you don’t have excess cash sitting on the sidelines? No worries. Here are four other actions you can take.
First, rebalance your portfolio. Since stocks have fallen faster than bonds, your account may have a larger allocation to bonds currently. By selling some of your bonds and reinvesting the proceeds into stocks, you not only rebalance your portfolio, but you also buy stocks while they are down in value. Who doesn’t love a bargain?
Here’s another idea: If you have a taxable investment account – not an IRA or 401(k) – you should investigate tax-loss harvesting. This is when you purposely sell investments at a loss. That runs counter to the buy-low-sell-high mantra, but there is good reason for it.
By selling investments at a loss, you can bank those losses and can use them to offset gains, now or in the future, and even offset up to $3,000 in ordinary income. Keep in mind, if you sell an investment, you cannot purchase the same investment in the 30 days before or after the sale. If you do, you are not able to claim the loss.
Roth conversions are another tactic to consider. If you have money in a pre-tax IRA or 401(k), you could convert those dollars into a Roth account. By doing so, you would trigger income taxes on the amount converted. But any future growth in the Roth account would be tax free, assuming you meet the various requirements, such as the five-year holding period for Roth IRAs.
If stock and bond markets turn around, you could see nice growth in investment values again. If you have converted your money into a Roth account, all of that future growth will be tax free.
And finally, if stocks continue falling from here, you may want to consider over-allocating your portfolio to stocks. This should only be done if you can afford to take the risk. The U.S. stock market has always rebounded. It’s faced two world wars, a depression, multiple recessions, high inflation, low inflation, planes flying into the World Trade Center and it’s always come back. It will again this time, too.
Investment losses aren’t fun. But following the five actions discussed above allows you to make hay even though it’s raining. And when the sun eventually shines again, your accounts and investments will be ready to soak it all in.
Justin Lueger is President of Invisor Financial LLC, a registered investor adviser firm in the State of Kansas. All opinions expressed are his own and should not be viewed as individual advice. He can be reached at [email protected]
This Column is paid for by Invisor.