Four Opportunities to Consider in a Down Market

Since the beginning of 2022, the markets have been experiencing volatility over concerns about rising inflation and interest rates. The S&P 500 appears close to a bear market, and the Dow Jones Industrial Average recently hit a 52-week low.

Looking at retirement or investment statements in a down market can feel frustrating for many people. At the same time, down markets can provide some great opportunities for disciplined and patient investors. Below are a few opportunities you could consider in a down market:

Opportunity #1: Buying More Shares

Your wealth is eventually a function of a) the share you own multiplied by b) the future price of your shares, which means down markets could give you a chance to purchase more shares today than you could have purchased just six months ago.

For example, check out this S&P 500 chart:

If your investment strategy calls for holding a portion of your portfolio in stocks for the long run, you might look at a down market as a great time to add to your holding. Why? Because you might be able to purchase the same number of shares at a 13-15% lower price than what you would have paid back in December of 2021.

Furthermore, if we happen to be near the bottom of the current downturn, history reveals that the next 12 months could be very rewarding. The “past growth scares and bear markets” chart below tells a compelling story; we’ve seen market recoveries of 21.4 – 77.8% 12 months after markets bottomed out!

Opportunity #2: Build More Tax-Free Retirement Income at a Lower Cost

Having money in a Roth IRA can provide you with tax-free retirement income and other important benefits. Down markets can be a great time to boost the amount of money you could access tax-free in retirement through Roth IRA conversions. So how does a Roth conversion work?

It’s just three simple steps:

Step 1: Convert funds from a tax-deferred retirement plan (IRA, 401(k), 403(b), etc.) into a Roth IRA. A qualified financial planner with retirement and tax forecasting software can help you explore how large of a conversion you should consider.

Step 2: Pay the taxes on your Roth conversion

Tax-deferred funds converted to a Roth IRA will trigger an income tax in a Roth conversion. In a conversion, you essentially “rip the band-aid off” to pay a smaller tax today and avoid a larger tax bill in the future. Down markets could allow you to save money on a Roth conversion because you can convert the same number of shares in the downturn compared to the previous market high.

For example, suppose you are in the 24% federal tax bracket and that you had a traditional IRA worth $100,000 back in December of 2021. If you converted the entire account when the balance was $100,000 and paid a 24% federal income tax bill, you would have owed Uncle Sam $24,000.

Now let’s assume that you didn’t convert the account in December of 2021 and that your account is worth $80,000 today. The tax 24% tax bill would be 20% lower ($19,200 vs. $24,000) to convert the entire account than it would have been in December.

Step 3: Enjoy knowing you have more tax-free retirement income to help secure your future

More tax-free income sitting in a Roth IRA to fund your future life goals can pay big dividends. For example, did you know that having just $100,0000 in a Roth IRA could provide you with over $1.3 million in 30 years if you had a 9.0% investment return?

Have you wondered if you make too much money to contribute to a Roth IRA? Don’t worry! There are no income restrictions on Roth IRA conversions. That’s right, even Warren Buffet and Elon Musk are not restricted from doing Roth IRA conversions.

You might be getting excited about lowering your future tax bill through Roth IRA conversions, but please be careful! Unlike years past, you can’t undo a Roth IRA conversion if you accidentally convert too much money, which could trigger unwanted taxes, reduce government benefits, or push you into an undesirable tax bracket.

Work with a qualified financial planner and your tax accountant to help determine how much of a Roth IRA conversion would be ideal for your situation.

Opportunity 3: Tax-Loss Harvesting

Tax-loss harvesting is when you sell some investments at a loss to offset gains you’ve realized by selling other stocks at a profit. You only pay taxes on your net profit or the amount you’ve gained minus the amount you lost, thereby reducing your tax bill.

Some investors use the proceeds from selling their underperforming stocks to fund purchases of similar investments that may grow over time and help recoup their losses. These future gains can then be offset by future losses, perpetuating a cycle of tax savings.

For additional information on tax-loss harvesting, click here.

Opportunity 4: Max Out Your 401k Early

During this down market, one strategy to consider is maxing out your 401(k) early. This can benefit you if markets rebound in a short time period similar to the COVID 19 market correction which took just four short months!

If the market goes up throughout the remainder of the year, maxing out your 401(k) now instead of November or December can give you several additional months’ worth of growth.

However, be careful with this strategy if your employer offers a company match!

Some employers only make matching contributions during pay periods when you are actually contributing to your company retirement plan. If you front-load your contributions, it could mean you’re leaving free matching money on the table.

Let’s look at an example:

The 2022 401(k) maximum deferral is $20,500. You make $205,000 and contribute 10% of your pay to max out your 401(k) by the end of the year. Your employer matches half of your contributions or $10,250 for the year, but they only match when you make contributions. If you max out your contributions halfway through the year by 06/30/2022 by front-loading your 401(k), you will lose out on $5,125 (half the matching contributions)!

If you tend to worry about your financial situation during market volatility, you are not alone! I wrote an article recently that discusses three things you can do during market volatility that could help you worry less. Click here to read more.

And, of course, if you are still worried, don’t hesitate to pick up the phone to call us. You can also request a consult where we can help you customize a plan to help secure your future, even during difficult times. Our 90-minute consultation is always at no cost to you!