Broker Check

Timely Information on the Markets

| May 23, 2022

Given the market’s sell off recently, this week’s Weekly Market Review is different. 

Please take a few minutes to read below with your own situation in mind.  These are action items to help you best manage through this difficult market and ultimately prevail in a solid, or even improved, financial position. 

Five Ways to Take Advantage of a Bear Market

Over the last 140 years, the stock markets have experienced many highs and lows. However, when the market goes through a prolonged period of price declines, it is known as a “bear market.” During those negative cycles, more often than not, people want to “stop the bleeding” and “preserve their money”.  We would like to suggest some significant opportunities that exist when the market is down. Here are five ways to take advantage of a bear market:

  1. Save on current taxes. Most taxable portfolios will have a mix of investments – some will have gains and some will have losses. If you have an asset that has a gain, you may be able to offset the taxes owed on that gain by selling another asset with a loss. This process is called “tax-loss harvesting” and the objective is to sell a capital gain and not owe taxes.
  2. Save on future taxes. If you have money tied up in a Traditional IRA where your taxes are being deferred, you may want to consider doing a Roth conversion while the market is down. Even though this does create a current year tax liability, if you take the growth related assets in the IRA and convert them to a Roth IRA, the growth you experience over time in the Roth IRA would be Tax-Free when withdrawn instead of taxed as ordinary income. Additionally, Roth IRAs are not subject to the required minimum distribution (RMD) rules that start at age 72 and can be passed along to be beneficiaries tax-free. 
  3. Go Shopping. I do not mean for you to go buy a new TV or car, however, you should maybe look to buy investments with a history of paying dividends. Dividends are paid on a per share basis and many corporations have a long history of increasing their dividend payout over time. If you make these investments while prices are lower, then it is safe to think you will have higher yield over the long term.  Also, dividends are an excellent way to buffer the volatility of the markets.
  4. Right-size your risk. If you are in the middle of a market downturn and you find yourself deeply concerned or unable to sleep, this may be due to an over allocation to growth investments. Consider giving us a call to discuss the current risk profile of your portfolio. Doing this may keep you from making adverse knee-jerk reactions in the future.
  5. Do Nothing. There have been 24 bear markets (20% drop) since 1928 as measured by the S&P 500. The numbers represent an average drop of 30% with an average duration of about a year. The average time it takes to “get your money back” after those periods was about 2 years (less than 1 year half the time). If you sell out, you have to know when to buy back. These two actions are extremely difficult to time well. In fact, if you look at the chart Missing Top-Performing Days Can Hurt Your Return (provided by Seeking Alpha & Blackrock) you will see that missing JUST the 10 best days of a bull market would cut your returns by almost 35% and if you missed the best 25 days you would experience an almost 75% reduction on returns. This shows that it is “Time IN” the market that more likely makes you money rather than “Timing” the market.

However you choose to look at things, there is always an opportunity to improve your current or future financial condition. If you need assistance or would like to discuss these ideas, please contact us and we will walk you through implementing any of these strategies.

Additionally, American Funds, a long-time partner of ours, has provided some very useful information that gives you education, context, perspective, and hopefully perseverance. Click Here For Keys to Prevailing through Stock Market Declines

As always, we hope you find this information helpful.  Have a great week!

Michael J. Levine, CLU, ChFC