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In an ideal world, stocks would always go up and we would never have to consider a sell-off. In reality, however, market declines are part of the game. In fact, the S&P 500 averages 3.4 declines of 5% or more per year, a topic we covered in a previous article. Market dips don’t have to be all bad news, though. Here are four ways smart investors can use a sell-off to their advantage.
1. Tax-Loss Harvesting
With this strategy, investors “harvest” losses to lower their tax liabilities. Tax-loss harvesting generally involves selling certain securities at a loss in order to reduce total taxable capital gains. When you pay taxes on your realized capital gains, only your net gains are considered: How much you gained minus any losses. As such, a down market can present an opportunity to harvest losses to help reduce your tax bill this year or coming years (you can “carry forward” losses to future tax years). In a volatile market where price movements can be swift, we recommend consulting with an expert before executing a tax-loss harvesting strategy.
2. Roth Conversion
In a standard Roth conversion, investors convert pre-tax dollars from qualified accounts into tax-free Roth savings. The conversion typically generates taxable income on the amount converted (except in the case of non-deductible contributions) as a trade-off for the tax-free growth and withdrawals enjoyed during the life of the Roth. If you’re not sure whether a Roth conversion makes sense, we can help you decide. If it does make sense, a market dip—with the belief that the market will recover before withdrawals are expected—can be an optimal time to make a conversion. Because the current value of your investments is lower, you’ll pay lower taxes, and your assets will grow tax free as the market recovers.
3. Mortgage Refinance
During the current market dip, we’ve seen very low mortgage rates, even before the Fed’s most recent emergency actions. This could create a prime opportunity for you to review refinance opportunities with the goal of lowering your rate or monthly payment, or consolidating debt. As always, there are a number of considerations that factor into the decision. Let us know if you’d like to explore if a refinance could benefit your financial plan or if you need help getting started.
4. Invest or Deploy Cash
Market declines can offer a great opportunity to invest cash held outside your investments. In our current volatile market, we typically recommend techniques such as dollar-cost averaging, which can help smooth out your entry points over the course of multiple weeks.
If you don’t have sidelined cash, consider other ways you might already be saving. For instance, most of our clients contribute an equal amount to their 401(k) accounts each month. During a market dip, you might consider “front-loading” your savings: Increase your contributions to take advantage of lower stock prices.
Review Your Portfolio
Lastly, it’s always wise—regardless of the market environment—to review key elements of your portfolio, including costs, long-term risk levels and tax strategies. Make sure internal expenses are low, holdings are tax-efficient, savings are directed to appropriate vehicles and that your overall strategy aligns with your risk tolerance. If you’re not sure where to start, check out our stress-testing tool.
Market volatility and stock declines are difficult to weather—but savvy investors know there are silver linings. To learn more about how we’re monitoring the current market conditions, check out our latest webinar.
Investment advice offered through Stratos Wealth Partners, Ltd., a Registered Investment Advisor DBA BWM Financial. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stratos Wealth Partners and its affiliates do not provide tax or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax or accounting advice. You should consult your own tax and accounting advisors before engaging in any transaction.