Productive Financial Steps to Take in a Bear Market
Bear markets are not a fun time to invest. It can create a lot of stress, anxiety, and pain that can distract you from reaching your long term financial goals. There are actions you can take to help you stay on track despite the negative headlines. Bear markets and recessions can cause you to take actions out of fear. Sometimes we want to take action because we feel we need to do something. Here is our list of positive things to do during a bear market.
Tax-Loss Harvesting
Market downturns can lead to losses on the individual holdings within your portfolios. You can take this opportunity to sell your investments with losses strategically. Tax-loss harvesting allows you to offset gains you have to take this year or use up to $3,000 of losses against your taxable income. You can carry over losses into the next year if you have more than $3,000. Tax-loss harvesting only applies to your non-qualified investment accounts. If you sell something at a loss, you can purchase it back after 30 days and still keep the tax losses.
Rebalance Your Portfolio
While certain investments are lower, it can be a good time to rebalance your investment portfolio. You can bring your portfolio back into alignment with your strategic asset allocation. Often it does not make sense to rebalance because you are concerned it might trigger capital gains in your taxable account. Rebalancing during a bear market allows you to be strategic by pairing this with tax-loss harvesting to limit or reduce your taxes paid.
Using a Rainy Day Fund
Your emergency fund or rainy day fund is something you build up for a time when you might need it. A recession or bear market is the exact time to use these funds if you are experiencing economic distress from a layoff or reduction in your income. Many of our clients are reluctant to dip into their emergency funds but this is the environment to use your savings. It is ok to dig into these funds if your income is lower.
You can also use your rainy-day fund proactively as well. If you are fortunate and feel comfortable about your job and future income, you can strategically put this money to work. You can fund things like a Back Door Roth IRA contribution or a 529 contribution. If you have certainty about your income and are not putting yourself in a position of financial stress, you can start to accelerate certain things like a remodeling project if you might be able to get favorable pricing during a recession. Only do this if you feel confident about your financial position and are not draining your emergency fund down. You should also have a clear plan on how you plan to rebuild your emergency fund back to normal levels.
Roth Conversions
A silver lining of a bear market is it is more attractive to convert part or all of your IRAs to a Roth IRA. Additionally, if your income might be lower this year, it worthwhile to run the numbers. You can use online calculators to help review your situation. Generally, if your tax rates today will be lower than your expected tax rates in retirement, take a look at converting. You don’t have to convert all of your IRAs funds this year either. However, if you convert all of your funds, it does open the door for a back door Roth IRA in the future.
Increase your 401(k) Contribution
We encourage our clients to nudge their 401(k) contributions higher each year. The goal is to reach the level where you either hit the max contribution level or the percentage that will help you reach your goals. Increasing your 401(k) contributions now will allow you to buy your investments at lower prices.
Update or Create Your Financial Plan
It is common that people don’t want to or refuse to look at their investment statements when markets are down. I don’t blame you! Looking at your statements might create anxiety because you don’t know how their performance will impact you reaching your goals. This is why it is essential to have a financial plan. Reach out to your financial planner to update or create your financial plan. You will probably be surprised that a bear market has not impacted your chances of reaching your goals nearly as much you might suspect. This may bring some relief and bear markets are something most financial plans take into account when they are built.
Take a Snapshot of Your Current Emotions
You may be feeling a lot of anxiety because of a recession or bear market. This could be a result of not being as financially prepared as you should be or because your investments were not positioned correctly heading into a market correction. Whatever the reason, it is important to write down how you might be feeling to take a snapshot of your emotions. Things will recover and this can serve as a reminder to reference back during better times. It may serve as a reminder to make sure your emergency fund is topped off or you rebalance your investments a little more regularly.
ANDREW COMSTOCK, CFA
Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.