Play “Offense” When the Market Goes Down
By; Brian Seay, CFA
Market volatility and drops make us want to close our eyes and stop watching our portfolios.
But challenging markets are not the time to run away and hide. It’s time to go on offense to save future taxes, transfer assets and get ready to take advantage of the next market cycle
Here are five key strategies to consider:
Tax Loss Harvesting: Leverage market losses by selling off investments that have declined in value to offset gains elsewhere in your portfolio. This strategy can reduce your taxable income and potentially result in significant tax savings.
Rebalance Your Portfolio: When stocks decline, your portfolio's asset allocation may become skewed. Rebalancing involves selling assets that have performed well and buying those that have underperformed to maintain your desired allocation. This can help manage risk and position your portfolio for future recovery.
Shift Wealth to the Next Generation: Down markets can be an opportune time to gift assets to heirs, as the lower valuation reduces the taxable value of the gift. Consider utilizing trusts or other estate planning tools to efficiently transfer wealth while minimizing tax implications.
Invest in Tax-Advantaged Accounts: Maximize contributions to retirement accounts like IRAs and 401(k)s, which offer tax benefits. The lower market prices mean you can buy more shares for the same amount of money, potentially benefiting from future gains.
Consider ROTH Conversions: Market downturns can help you maximize the value of a ROTH conversion. You can move more assets from your IRA into a ROTH while sticking to your original tax budget for the year. As those assets appreciate long-term, you will have reduced the taxes you pay on your total portfolio.