Adjusting our Sails

With the recent drop in stock values, it is natural to make our way through the stages of grief.  Eventually, when we reach a place of acceptance, we may then turn our attention to opportunities to take advantage of the situation.  We may have preferred consistent wind speed and direction on this sailing excursion, but all we can do is adjust our sails. 

Keep buying when prices are low – If you are in the accumulation phase of life, this market downturn is an opportunity to buy low.  Oftentimes, workers adjust their contributions to their employer-sponsored retirement plans to only buy bonds or cash or even stop contributing altogether.  For a worker with time on their side before retirement, a down market is a gift from the market.  If any changes should be made with retirement contributions during a down market, they should be to increase the contribution and steer more of those dollars towards equities.

Invest cash on the sidelines – Having an emergency fund is part of a prudent financial plan.  However, the size of an emergency fund can go from prudent to overly cautious at a certain point.  If your cash reserves could quite comfortably handle many emergencies at the same time, you may be losing out on possible gains by investing some of those dollars in the long run.  Lower stock values can create a better incentive for moving the excess funds from short-term to long-term assets.

Tax Loss Harvesting – If you have investment positions that have lost value compared to their purchase date, you can realize those losses by selling them and reinvesting in new funds.  Capital losses can offset capital gains and up to $3,000 of ordinary income.  As a word of caution, if an investment is sold at a loss and then purchased again in the following 30 days, the original cost basis is assigned to the new shares, and the loss is disallowed.  This is called a wash sale.  Also, harvesting losses only apply to taxable accounts, not retirement ones like 401(k)s and Roth IRAs.

Sell Unwanted Winners – You may have a position that you have held for a long time and has a large gain but hasn’t performed well lately.  This conundrum encourages investors to hold a position only for tax reasons.  In a down market, the unrealized gain may be easier to handle, especially if you can sell other positions at a loss to reduce the overall gains.

Make Roth Conversions – Another great strategy to take advantage of could be to convert Traditional IRA funds into a Roth IRA.  The downside is that the amount converted is taxable this year, but the upside is that any future growth occurs tax-free in the Roth IRA.  There are a lot of factors to consider, such as your tax bracket and income expectations in future years and how much time the assets can be compounded in the Roth IRA.  However, when stocks go down, their expected future growth rate goes up.  When stocks plunge, the prospect of moving more shares to your Roth IRA for the same amount of dollars to be taxed is an incentive worth considering.

Rebalance – When our portfolios are out of balance, it can be tempting to not rebalance them for tax reasons.  In a down market, those reasons are diminished and can give us an opportunity to get back to our original target and plan.

Ultimately, there are events that we have little to no control over that affect our investments.  Good investors don’t waste time and energy wishing that those things would change.  The best we can do is to make the most of whatever situation we find ourselves in.