If the coronavirus was not stressful enough, a bear market can be cause for many to feel worried. Whether or not to worry depends on a few factors including your need for liquidity, and how close you are to retirement. If you have time, odds are you shouldn’t worry about daily market movements. If you’re retiring, or retired, your portfolio should already be structured to provide income and enough liquidity to weather a down market.
Remember, while the average bear market lasts 1.3 years and has a loss of 38%, by contrast, bull markets last an average 6.6 years with a gain of 334%. Rather than worry, there are several planning strategies that may help you come out financially stronger on the other end.
When markets are down, the last thing on most minds is investing more. Down markets present buying opportunities for long-term investors. You should consider this with new funds, and specifically look to fully fund your retirement accounts and take advantage of their tax benefits first.
An IRA allows for tax-deferral on gains, but you must pay income tax when you withdraw funds in retirement. Converting IRA assets to a Roth IRA requires that taxes be paid now on the amount of your conversion, in exchange for tax-free future growth. Additionally, unlike a Traditional IRA, Roth IRA accounts do not have Required Minimum Distributions (RMDs). This can assist you with accumulating more wealth during retirement and passing that wealth along to your heirs in a more tax efficient manner. When markets are down, it may be an opportune time to consider a Roth conversion.
A 529 College Savings Plan is one of the most tax-advantaged savings vehicles available. Not only do funds in a 529 grow tax-deferred, if withdrawn for a qualified education expense, all gains are withdrawn tax free. Whether you are making contributions to a 529 College Savings Plan for your own child or are considering making a gift to a 529 Plan for a grandchild, a down market is the perfect time to do so.
For investors who have unrealized losses in their portfolios, they may want to consider selling those investments to realize a capital loss to offset future gains. While investors should be careful about selling stocks and missing potential upswings, you can always replace a sold investment so that you remain invested.
Many investors may have concentrated positions in specific stocks or sectors. Often, diversifying the position is difficult due to large capital gains. While markets are down, investors should review their portfolios to consider diversifying any concentrated positions at these lower prices.
While volatility is scary, ultimately this too shall pass. Rather than focus on the magnitude of market corrections, you should focus on the nature of your long-term plan, managing your emotions, and taking smart steps to make sure you come out better on the other side.
About the Author
Mike Flower, CFP®, is managing director, partner, at Hightower Financial Principles in Fairfield.
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