How To Take Advantage of Market Downturns?

In this video, we discuss five strategies to make the most of market downturns:

  1. Invest Cash on Hand: Invest any available cash in asset classes that have dropped by 10% or more. Consider front-loading your investments during market dips.
  2. Roth Conversions: During a market downturn, it’s an opportune time to perform Roth conversions. Converting pre-tax money to a Roth IRA when asset values are lower can result in lower tax liabilities.
  3. Tactical Asset Allocation: If you have excess fixed income investments, consider selling high in fixed income and buying low in equities during market downturns. This tactical asset allocation can help your portfolio recover more quickly.
  4. Tax Loss Harvesting: Utilize tax loss harvesting in non-qualified accounts to offset capital gains or reduce your taxable income. Selling investments at a loss can be strategically advantageous during market volatility.
  5. Optimize Required Minimum Distributions (RMDs): If you have RMDs you don’t need for immediate expenses, take them out during a market downturn and reinvest immediately in a non-qualified account. This can potentially lower your tax exposure.

Additionally, explore opportunities beyond your investment portfolio, such as purchasing a house or other goods when the market is down. Tailor these strategies to your specific financial situation and consult a financial advisor for personalized advice.

 

 

Video Transcript

Today’s video, we’re going to talk about ways to take advantage of market downturns. So, Matt, in January of 2022, we saw a pretty significant market pullback. The S and P 500 was down almost 10% year to date.

So what are some things that we did as a firm besides you buying sleeping bags for everybody that we incorporated for our clients? Well, first of all, the the sleeping bag were a joke. And no one ended up staying overnight that I know of.

And if they did, I’ll deny that to the death. But anyway, so top five things that we would recommend to do when a market takes a double digit dip or greater is first, any cash that you have on hand that’s outside of keeping your emergency fund intact, we would recommend to invest in any asset class that’s gone 10% or lower.

If you’re on a dollar cost average plan where you’re investing consistently every month, if you have the cash, definitely front load, that the double digit. For example, 10% drop may not be the greatest dip that we see, and it’s impossible to buy the lowest point, but that is an on sale opportunity.

If we’re planning on getting a car and it’s at a 10% on sale, get the car. Same thing for your equity investing is put the money in. So put capital or put cash to work. That’s takeaway number one. Takeaway number two is for clients that were planning to do Roth conversions.

So taking pre tax money, let’s say, for example, $100,000, transferring it to a Roth by doing a Roth conversion and paying taxes on that amount when a market goes down, that’s the perfect time to do a Roth conversion.

Let’s say the 100 has dropped to 90. We convert the 90 be to a Roth. We’re now only paying taxes on the 90,000. So it’s going to be significantly lower tax bill. And then once the money is in the Roth, the recovery back to 100 and then forever moving forward.

Assuming you wait till 59 and a half, and that a five year time window at least has passed all of that money, the money. That was converted plus all the growth is forever tax free to you or a spouse.

Or if you pass it to your kids, they have to take it out the ten years. But still there’s no income taxes on that money. So doing a tax planning called Roth Conversion makes complete and most sense during a market downturn to do so on sale.

The third tip that we have is for clients that have some fixed income exposure beyond the seven year backup that we recommend. So, for example, if you’re retired and you have 100,000 per year that you’re taking out on top of pensions or Social Security and you have 700,000 after tax basis available in something safe, let’s say if that client has a million dollars of safe money.

We’d recommend to take that excess of 300,000 and sell high in that fixed income and buy low in equity. So for example, for clients that have the capability to do that without sacrificing that seven year safety net rebalance, for example, if a client’s a 60 40 investor in retirement and we see a 10% drop, we’d recommend to sell high in the fixed income and buy low in the equities and move to a 70 30 allocation.

Then when the market fully recovers, then move back to the 60 40. So we call this tactical asset allocation. Be able to act very quickly. To sell high and buy low will not only allow for a quicker recovery, it allows for more of a sustained financial security throughout retirement.

The fourth thing that we recommend doing is what’s called tax loss harvesting and non qualified accounts. So for anyone that has a paper loss, because again, a loss is only a loss unless it’s realized, and a gain is only a gain unless it’s realized.

If you have a non qualified account and you have an S and P 500 index fund that’s dropped below your basis, you can sell that purchase a similar not an identical, but a similar fund. And let’s say it drops from 190, we sell it, we exchange a new fund for 90, and then that eventually recovers to 100.

That $10,000 loss is not a $10,000 loss to you because we’re still at the same place, but that can be carried forward, and up to 3000 per year of that can be offset on your income each year, and 100% of that can be offset against any long term gain that you experience.

So to capture those losses in a non qualified account, to lower your capital gain exposure at some point in the future, and if not, your income exposure up to the 3000 limit per year as well. So, perfect opportunity.

A tax loss harvest is when we see volatility in the marketplace. And then the fifth and final point is if someone has a required minimum distribution that they’re not going to use, that can be immediately reinvested, we would recommend to take the required minimum distribution out of the account while the market’s down and then reinvest the money immediately into a non qualified account.

So then the recovery occurs in a capital gain rate environment, which potentially would only be 15%, versus maybe that RMD came out at 32%. So we can lower our tax exposure by half if we get the RMD out and get it reinvested right away.

If your monthly spend is actually utilizing your RMD, then we would never recommend to take the RMD when the market’s down. We’d want to only take it at a good time to actually experience a gain. But if you’re taking it out and immediately you’re investing it into a better tax environment, then that would be good to do so during a volatile period.

Look at the total marketplace. Typically, if there’s a big correction in the marketplace, like the financial crisis in 2008, for example, if you’re in a good financial position, maybe this is a good time to purchase a house when the market’s getting hit.

Maybe this is a good time to. To purchase some other goods that you would otherwise purchase. So not just in your investment portfolio, but look at the marketplace, look at your life and see are there any other opportunities that we can take advantage of while the market is low?

If you have any questions about your specific situation with regards to the down market here, feel free to reach out. We’re happy to help.

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