3 Things to Consider in a Down Market

Did you think there was nothing you could do?

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If you have observed the recent stock market decline and follow a traditional ‘buy and hold’ approach you may not be doing much of anything right now. Maybe you’re biting your nails and waiting for the right piece of economic data to turn things around. But is there something more you should do even if you have sworn not to be a market timer?

As it turns out there is plenty to do:

  1. Rebalance Your Account – One of the most common investor mistakes is to sell stocks and/or stock mutual funds once they have gone down in order to ‘avoid’ further losses. In fact, selling after a decline makes the loss permanent. What might be a better approach is to buy more stocks after a decline to take advantage of lower prices. For example, let’s assume you have 2 assets that are each 50% of your portfolio. If one declines to 45%, the other has to go up to 55%. If you are trying to maintain 50% in each asset then you need to buy 5% more of the asset that is down to 45%. If you follow this approach with an investment portfolio, in both up and down markets you would be buying low and selling high. This is much better than simply getting out or doing nothing at all.
  2. Reduce Your Taxes – If you have non-retirement assets that appreciated over the last few years and were sold early in 2011, you may have realized some decent-sized gains. If you now have some assets held at a loss, you can sell them to off-set these earlier gains with the recent losses.
  3. Undo your Roth Conversion – If you converted an IRA to a Roth IRA in 2010 or 2011 you may have paid taxes on an amount that is no longer in your Roth IRA. Investment declines may have reduced the amount you converted, but this can be undone through a recharacterization. This is a rare ‘do over’ opportunity but might be the right decision to recoup some taxes you paid or will by next year. You generally have until the deadline for federal tax extensions to complete a Roth IRA recharacterization (for 2010 Roth conversions that date is October 17, 2011).

For more ideas, check out Rick Rodgers’s article from Lancaster County Magazine – 6 Ways to take Advantage of the Market Downturn.

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