Recent weeks have seen the market grappling with concerns surrounding tariffs, economic growth, and inflation, leaving investors searching for any glimmer of hope. While a downturn can feel unsettling, it’s important to remember that market fluctuations are a normal part of the investment cycle. Instead of solely focusing on potential losses, savvy investors can consider proactive strategies that may offer long-term advantages. Rather than attempting to time the market’s peaks and valleys, which is often a fruitless endeavor, let’s explore four key moves centered on portfolio maintenance, tax efficiency, and long-term growth during a challenging market.
1. Rebalancing Your Portfolio
Market downturns can significantly shift the asset allocation of your portfolio. Assets that have performed poorly will represent a smaller portion, while those that have held up relatively better will constitute a larger share. This drift can lead to a portfolio that no longer aligns with your intended risk tolerance and long-term goals. A declining market presents an opportune time to rebalance your portfolio. This involves selling some of your better-performing assets and using those proceeds to buy more of the assets that have declined. In essence, you’re buying low and selling relatively high, a fundamental principle of sound investing. Rebalancing helps maintain your desired asset mix, potentially reducing risk and positioning your portfolio for future recovery.
2. Tax Loss Harvesting
While selling investments at a loss might seem counterintuitive, it can offer valuable tax benefits through a strategy called tax-loss harvesting. By selling underperforming investments, you can use those losses to offset any capital gains you may have realized during the year, potentially reducing your tax liability to zero. Furthermore, if your losses exceed your gains, you can typically deduct up to $3,000 of those losses against your ordinary income each year. Beyond the tax advantages, tax-loss harvesting can also be a strategic opportunity to prune underperforming assets from your portfolio and potentially reinvest in more promising opportunities, all while being mindful of wash-sale rules that prevent you from immediately repurchasing the same or substantially similar investment.
3. Increase Retirement Savings
A down market can be viewed as a sale on future returns. When asset prices are depressed, contributing more to your retirement accounts, such as your 401(k) or IRA, allows you to acquire more shares or units at a lower cost. This practice of increased retirement savings can amplify your potential returns when the market eventually recovers. If you typically wait until the end of the year to make IRA contributions, consider accelerating your contributions to take advantage of the current market conditions and allow more time for potential growth. Similarly, if you have excess funds in a Health Savings Account (HSA) beyond immediate medical needs, consider investing those funds, as any gains can grow tax-free for future healthcare expenses.
4. Roth Conversions
A market downturn can create a compelling opportunity for Roth conversions. When the value of your traditional, tax-deferred IRA is temporarily lower due to market depreciation, converting a specific dollar amount to a Roth IRA allows you to move a larger quantity of assets into a tax-advantaged account for the same tax cost compared to converting when the market is high. While the immediate tax impact depends on your current income and tax bracket, the long-term benefit lies in the fact that all future growth on those now-Roth assets, and qualified withdrawals in retirement, will be entirely tax-free. By strategically converting during a dip, you position more of your wealth to grow without future tax implications, potentially leading to significantly more tax-free dollars in retirement.
Conclusion
While a declining market can be unsettling, it also presents opportunities for long-term investors to take proactive steps. By focusing on strategies like rebalancing, tax-loss harvesting, increasing retirement savings, and considering Roth conversions, you can potentially navigate the turbulence and position your portfolio for future success. Remember, the key is to act with intention, aligned with your long-term financial goals, rather than reacting emotionally to short-term market fluctuations. If you are interested in any of these strategies or feel you may be missing out on any of them, contact the Voisard Asset Management Group team today.
