While economic and stock market news continues to be negative, I wanted to share a few things I do to take advantage of the current circumstances that can benefit down the road. I’m a believer in the quote “when life gives you lemons, make lemonade”.
I remember writing a similar article like this back in 2020 during the COVID bear market. Just two years ago, we were hiding out in our homes, fretting over a global pandemic and worrying about an economic collapse while the stock market was down close to -40%. Today, the unemployment rate is just 3.6%—barely above the 50-year low of 3.5%—and folks are spending so merrily that we now have 8.6% inflation. Clearly, all is not right with the world, but that doesn’t seem to justify today’s widespread pessimism.
Just take a look at history - if we include the Great Depression, the average bear market decline is -36%. The S&P 500 is currently down -19% and it was down as much as -24% earlier last month. If this is a typical bear market, we’re roughly more than halfway through. My contention: there’s more room for upside now than there is for more decline.
In fact, you can count me among the optimists. Here are a few ways I try to “make lemonade” with finances:
1. Tax-loss harvesting
When stocks or stock mutual funds in a taxable account decline in value, we have an opportunity to “harvest” those losses and reduce tax liability.
For example, if fund A declined in value from $20,000 to $16,000, that means you may have a $4,000 loss that can be “harvested” by selling that fund and buying a similar one. The $4,000 loss can be applied to offset any gains you may end up having for the year, and if not, can be used to offset up to $3,000 in non-investment income. If not used in the current tax year, the $4,000 loss can also be carried forward indefinitely to be applied against future capital gains later on, which can prove really useful down the road.
Tax-loss harvesting is a strategy that only applies to taxable accounts (single, joint). Tax-deferred retirement accounts like IRAs and 401(k)s grow deferred, so they aren’t subject to capital gains taxes. If you have questions about this consult with your CPA or please reach out to me.
2. Rebalancing your portfolio
This is an important one. Rebalancing is a very important part of portfolio management that can improve your long-term return over time AND potentially lower your risk.
Rebalancing means adjusting your holdings to realign your portfolio with your desired long-term asset allocation. There are benefits to rebalancing occasionally in that it controls portfolio risk and, at times, results in a higher return. For example, let’s say your asset allocation is 60 percent stocks and 40 percent bonds. Over time, and especially in volatile markets like this, that allocation will have shifted. The market is down now, so ideally a rebalance here would sell bonds and buy more on the stock side to restore the balance.
Maintaining your asset allocation is counter-intuitive to what is happening in the market, and that makes it hard. Buying stocks after losing money is rattling, and talking heads make matters worse by saying do the opposite because they always predict the future trend will be like the immediate past. Rebalancing creates benefits after the hard times pass, and there’s no reason to believe it won’t help again this time.
I rebalance accounts periodically throughout the year, but during times like this, I find it more advantageous to do so, especially if that can also coincide with the tax-loss harvesting strategy above.
3. Adjusting 401k allocations
To follow the rebalancing point above, now is a great time to re-evaluate your 401k investment mix. I’m happy to do a Zoom/Webex meeting where I can share the screen with you and evaluate your 401k plan for opportunities to rebalance or make adjustments (if needed) to the long-term strategy.
While some may not want to look at their 401k right now, it’s wise to be proactive and see what opportunities may be there instead of just letting it sit.
4. Increasing contributions/re-positioning
Speaking of 401k’s and savings, the decline in the market has presented a great opportunity to add more money in at a lower price point.
This is the counter-intuitive and hardest part about investing – the best time to add money in is when things look the worst and when uncertainty is the highest. To put it plainly, the best time to invest is when you feel the LEAST like doing it.
Think about it though - it’s much better to add money to your investments when the market is -20% down as opposed to last year when things were at an all-time high, since you are now getting investments “on sale”, so to speak. Consider increasing your 401k or IRA contributions if possible while things are down; if increasing them isn’t feasible then you could also front load the contributions so you get them in while the market is lower.
Even if you are not in a position to contribute, you still might benefit from doing a rebalance to a different allocation while the market is down. For example, if you have a 50% stock and 50% bond portfolio, it could be rebalanced to 60% or 70% stock focus to take advantage of a market rebound (assuming this aligned with your risk tolerance).
5. Keeping perspective
This is where savvy investors get their edge. It’s tough to outsmart the market or the economy. But we can play a different game—by focusing not on next week but on the next 3, 5, and 10 years. Does anybody doubt that a globally diversified stock portfolio will be worth more a decade from now? When we play the long game, figuring out what to do becomes a whole lot easier.
I wish you great rest of the week ahead. If you have questions about any of the topics in this email or want to set up a call or video chat with me, feel free to reach out anytime, always happy to help.