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The stock market volatility we’ve experienced this year has officially pushed us into a bear market. A bear market is technically defined as a 20% decline in the broader stock market. As of late June, the Standard & Poor’s 500 Index is down about 20% from the beginning of the year.
The news isn’t all bad for investors, however. After a decade-plus of stock market gains, a bear market can provide you with opportunities to make necessary moves in your portfolio. Here’s a list of investment management and financial planning actions you can consider today to reset your portfolio for the next market gain.
Portfolio Moves to Consider During a Bear Market
Rebalance – Given the increase in stock market prices, more of your money may be invested in equities or specific sectors such as large-cap stocks or technology companies than you are comfortable holding today. Take the time to review your portfolio and rebalance if needed by trimming your stakes in certain investments. If you have wanted to own specific sectors or assets but held off because the bull market inflated their value, now may be an excellent time to purchase them.
Tax-loss harvesting – In rebalancing your portfolio, you may have capital gains on some of the investments you sell. But if you are also selling some assets at a loss, you can minimize capital gains taxes from your brokerage accounts by applying those tax losses against your capital gains.
For example, with a tax-loss harvesting strategy, you sell an investment that has fallen in value, then use the proceeds from that sale to purchase a similar security or asset. That allows you to offset your capital gains while maintaining your portfolio’s overall balance. Note there are rules around tax-loss harvesting you must follow. BWM Financial can help you analyze your portfolio to uncover tax-loss harvesting opportunities while ensuring you meet all the requirements for the tax break.
Review concentrated positions that could be diversified with lower tax impact – Similar to rebalancing and tax-loss harvesting, a bear market allows you to sell out of concentrated positions in your portfolio with less tax bite. For example, maybe you’ve received company stock as compensation and wish to diversify. Or you are holding in a technology company that has soared in value, but now it makes up more of your portfolio than you are comfortable holding.
Deploy excess cash – Perhaps you have money sitting in a brokerage or bank account you’ve been reluctant to invest in given the recent market highs. Now could be an excellent time to put that money to work in the market through individual stocks or more broad-based mutual funds and ETFs.
Review underperformers – It is unlikely all your stocks or other investments have fallen by the same amount. Review the performance of your holdings to see which may be dragging you down more than others or which investment strategies or companies you no longer want to own.
Financial Planning Moves for a Bear Market
Beyond portfolio tweaks, there are broader financial planning moves you can make in a bear market.
Making a Roth IRA conversion – If you own a traditional IRA and are considering converting to a Roth to enjoy tax-free income in retirement, this may be an opportune time to make that move. With the value of the holdings in your traditional IRA depressed, you’ll face a smaller tax hit for making the conversion to a Roth this year.
Getting money out of your estate at lower values with your unified exemption – If you’re looking to share some of your estate with your heirs before you pass away, a bear market can let you do that in a more tax-friendly way. Under estate tax rules, the same tax rate applies for the assets you pass down to heirs as a gift today or as an inheritance. In addition, any securities you gift today are valued for tax purposes on the day you give the security. So, if you gift shares of a stock that has fallen in value to your grandson, you will lock in the gift at that lower stock price, while your grandson can continue holding the stock while receiving any dividends and waiting for the share price to recover.
Fund retirement plans while asset prices are low – Though it’s essential to save consistently for retirement, investing more now can help you buy low. That’s especially helpful if you have many years until retirement. If you can, find a way to increase your retirement contributions to your workplace 401(k) or other retirement plans, and consider saving into a Roth or traditional IRA.
The Bottom Line
At BWM Financial, we are constantly monitoring our clients’ portfolios for opportunities to adjust the investments for rebalancing, tax loss harvesting, investing cash, along with reviewing underperformers and concentrated positions. We do this in the context of what moves to make and when to make them using objective indicators and client preferences.
We realize that watching the value of your stock market holdings decline is unsettling. However, realizing every bear market also brings opportunities, we believe that combining the portfolio changes with the financial planning techniques above, we can seek to optimize the decline in every aspect of your plan and portfolio.