Silver Linings When The Market Is Down

We know that it’s been an unnerving few weeks in the markets, and that staying the course can be difficult. A suppressed stock market can present a few opportunities in the midst of all the uncertainty.

Dollar cost average into markets.

We receive a lot of questions about retirement plans during times like this – people who are still working often wonder if they should stop contributing. Actually, continuing to contribute to retirement plans is one of the best things you can do – you are unknowingly taking part in a common investing strategy called dollar cost averaging.1  This is where you have the same amount of money withheld from your paycheck each time – say, $100. And, in your retirement plan you’ve already indicated what particular investments should be bought with each $100 contribution. When the market is up, you buy fewer shares with your $100. However, when the market is down, you are still spending $100, but you are buying more shares with the same amount of money, which will be beneficial to you in the future.

Set up some tax-free income in retirement.

For those of you considering Roth conversions – a strategy where you move funds from a traditional IRA into a Roth – a down market is a perfect time to do it. Again, if the plan is to convert, say, $10,000 into a Roth, then implementing this transaction when the market is down will allow you to buy more shares with the same amount of funds (or, conversely, purchase the previously-planned amount of shares, but now for much less). You’ll presumably continue to hold those shares for the long-term, and you will have effectively purchased them at a discount.

Reduce or eliminate capital gains tax.

Finally, a declining stock market presents opportunities for a strategy called tax loss harvesting. When you sell an investment in a taxable (non-retirement) account at a loss, you’ve locked in that loss. The good news is that you can use that loss to offset the same amount of gains in this or any future calendar year. For example, pretend you bought an investment, like a stock or a mutual fund, for a total of $100. Perhaps it went up for a while, but eventually dropped down below the original $100 cost. Let’s say you sold it when the value fell to $80, giving you a $20 “realized” loss. Now, say that in the same year you sold another investment at a $20 gain. Normally, you would pay capital gains tax on that $20. However, recall that you also have a $20 realized loss from the same year. You can use the realized loss to offset the realized gains, thus pocketing the gain, yet paying no capital gains taxes. Unused losses can be rolled into future years, and used against gains at another point in time, making accumulated (or “harvested”) losses very valuable.

Obviously, not all of these strategies work for everybody – much depends on the types of accounts people have, what’s in them, and various other pieces of a family’s financial life. We routinely communicate with individual clients on topics and strategies that are applicable to them, but if you wonder if any of these pertain to you, feel free to reach out to discuss.

1 Dollar cost averaging does not ensure a profit, nor does it protect against a loss in declining markets. All investing is subject to risk, including the possible loss of principle.