As terrifying as it may be to watch your portfolios dip, investors should resist the urge to drop everything and go scurrying into cash. The S & P 500 has tumbled 18% this year and briefly fell into a bear market during Friday’s session — a decline of 20% from its highs. The Nasdaq Composite , entrenched in a bear market, is off by more than 29% from its high. “Preparing yourself for that decline in the portfolio is like putting on your armor and preparing for the battle so that it’s not a shock,” said Blair duQuesnay, an investment advisor at Ritholtz Wealth Management. Follow these steps instead of letting fear drive your decisions. Sell intelligently and cut your tax bill Tax loss harvesting involves selling off losing positions in your taxable brokerage account and then using them to offset capital gains realized elsewhere in the portfolio. To the extent losses exceed gains, you can offset ordinary income by up to $3,000 a year . Don’t just sit on the cash from the sales. “Trade the position at a loss and buy into something else that will keep you similarly exposed in the market,” said Brenna McLoughlin, a senior advisor at Wealthstream Advisors. This way, you maintain your target asset allocation. Also, be careful when you pick out the investments you’ll be using to replace the losers you sold. That’s because the IRS will block you from deducting tax losses if you sell a losing position and within 30 days before or after the sale, you buy securities that are substantially identical to what you sold. This is known as the wash-sale rule . How easy it is to find a replacement will vary. “If you want to sell a U.S. large cap fund at a loss, there are millions of funds you can buy into to keep invested,” said McLoughlin. It may be a little more challenging with bond funds since they model themselves on different benchmark indexes and investors need to weigh duration and credit quality when picking substitutes, she added. Rebalance your portfolio Last year’s big market run-up resulted in massive stock weightings in investors’ portfolios. Rebalancing your portfolio allows you to keep your asset allocation in check. “This situation is weird because stocks are down and bonds are down, so it’s not this obvious opportunity for rebalancing,” said duQuesnay. Find the biggest winners in your portfolio and take some gains off the table, she added. The S & P 500 energy sector is up 46% for the year and includes good contenders. Invest the money from those proceeds and get your portfolio’s balance back to where it needs to be. This could mean buying up stocks at fire-sale prices. “This is how you buy low and sell high consistently without guessing,” duQuesnay said. Got an IRA? Convert it to a Roth Investors can turn a falling traditional individual retirement account into a tax savings opportunity by converting it to a Roth IRA. A traditional IRA allows you to invest pretax or tax-deductible dollars over time, but withdrawals are subject to ordinary income taxes — plus a 10% penalty tax if you’re under age 59½. If you convert the account to a Roth IRA, you pay income taxes up front. Money in this account grows tax-free and can be withdrawn free of taxes, subject to certain rules. Roth conversions are particularly attractive during market downturns . “If you’re considering converting your IRA to a Roth, now that the value is lower, you’ll pay taxes on this lower amount,” said duQuesnay. Once stocks recover, you’ll capture that appreciation in your Roth account on a tax-free basis. “To be a long-term investor is to be a short-term pessimist and a long-term optimist,” she added. “Stick to your plan and stay invested.”
Read More:Don’t let fear drive your decisions, even in a bear market. What investors should do next
2022-05-21 13:11:31