Opportunities During a Bear Market

Opportunities During a Bear Market Image
 

 

Opportunities During a Bear Market

I have spent the last few weeks in reviews talking about opportunities we see during a bear market like the one caused by the coronavirus.  We thought the most efficient way to educate our client base is to share some tips you might be able to take advantage of while the market is down.  The first two items on the list are procedures we are doing internally and require no client action.  The other four are food for thought and things you can take advantage of during this time when the market has dropped over 30% from its high just over a month ago.

  • We have redirected retired client’s monthly distributions from equities to bonds/fixed income.  When clients start the process of drawing on their retirement portfolios, we can be selective as to which part of the portfolio the distribution comes from.  During up markets, we generally take a larger portion of the monthly distributions from the equity/stock side of the portfolio.  In down markets, like this one, we can take the monthly distributions from the bond/fixed income side of the portfolio and give the stock/equity side of the portfolio time to recover.
  • Implement tax loss harvesting.  This process is more pertinent for clients in non-qualified accounts or accounts that don’t have “IRA” listed at the end of them.  Tax loss harvesting is the process of selling one investment in an account, taking a loss from that sell, and then buy into a different investment.  This could help offset any taxable gains the client may have at the end of the year from capital gains and/or dividends that aren’t tax sheltered, like they are in an IRA.
  • Contribute to my IRA for tax year 2019 before the tax deadline or put money into my IRA for 2020, while the market is down. 
  • Traditional to Roth IRA Conversions:  Many clients have traditional IRAs or pre-tax accounts, where taxes will be paid as money comes out of those accounts to live on in retirement.  The Roth IRA is an account that grows tax free.  With a conversion, we can move money from the traditional IRA to the Roth IRA.  This is a taxable event, but we can move over shares of a mutual fund, that have dropped in value over the last few weeks.  When the market recovers and those shares go up in value, the gains from that move will be tax free inside the Roth IRA.  The clients will pay the taxes in the calendar year the conversion is processed, but now with many people sitting down with their CPAs, it may be a good question to ask a tax professional if this could be a beneficial move for you.
  • Invest in a college savings account.  This could be a good way to take advantage of any state tax deductions as well as invest for college during a bear market.
  • Refinance your house.  We are not experts in the mortgage industry and rates jump around all the time, but past bear markets have shown opportunities in lower interest rates.  There are several refinancing calculators online or you can call your lender to see if there is an opportunity to lock in a lower rate.