If you’ve been following the news, you’ve no doubt been hearing terms like recession, market correction, bear market, financial crisis, and so on. And if you’re an investor, you’re keenly aware of the current market seesaw, which is influenced by factors like soaring inflation, rising interest rates, and the war in Ukraine.
While I don’t have a crystal ball and I’m not here to make projections, I’ll share a reminder you probably won’t hear from the media: downturns present opportunities.
This chart shows where the three leading indexes stood as of May 2, 2022, relative to their peak:
|High||Date of High||5/2/2022||Decline|
At the time these numbers were reported, both the DJIA and the S&P 500 were in correction territory. A correction is defined as a decline of at least 10% from its highest peak. Corrections, on average, happen once every 12 months. The average correction is a 14% decline. My clients hear me say that corrections are as common as dirt.
The NASDAQ has hit bear market territory. Bear markets are defined as a decline of at least 20% from the highest peak. On average, bear markets occur every 3.6 years with an average decline of 36%.
So, what are the potential upsides of a downturn? During market conditions like these, we help our clients take the following proactive steps:
- Rebalancing: This is the process of realigning your equities and the fixed portion of your portfolio. During a downturn, you have the opportunity to buy into the market at lower prices. You can do this by investing new money or selling a portion of your bonds to buy equities. If you have a stockpile of excess cash in your checking or savings account (likely only earning 0.03%), then it’s probably a good time to invest new money.
- Roth Conversions: Making a Roth conversion involves moving shares or cash from an IRA account to a Roth IRA. You’ll pay taxes during the same tax year the conversion is completed, so the goal is to make the conversion when the market is down. Then, once the market recovers, you’ll benefit from tax-free growth in your Roth IRA.
- Tax-loss Harvesting: Tax-loss harvesting is a way to sell underperforming stocks and use the loss to reduce your capital gains. This strategy minimizes capital gains taxes and allows you to offset up to $3,000 of income.
As an adviser, it is my job to help clients hold steady. When the market makes people uncomfortable, I am the one standing between them and the decision to sell. I remind them that downturns present opportunities. Notice I didn’t use the word “loss,” which is a forbidden word in my office. It’s never a loss until you sell the security. And downturns have been temporary. The market has recovered from every downturn over the last 220 years and gone on to new highs. We have no reason to believe this time will be any different. A good investor understands that investing is for the long term.