Making the Best of Down Markets

There is no sugar-coating it: investors in 2022 have experienced the biggest – and longest – down year for stock and bond markets since the 2007-2008 financial crisis. One of the only consolations is that over the past 13 years there have been tremendous gains overall, still with a few bumps along the way. Below I outline a few more consolations, or ways to make the best of down markets.

First a quick note: For newer, younger investors it may be difficult to not yet see long-term gains having accumulated in portfolios. Know that time horizon and future earnings potential are two huge positives working in your favor.

Here are a handful of ways to make the best of down markets – and to take advantage of higher interest rates (hint: there are more positives around higher interest rates than the media lets on).

For savers with healthy balances in pre-tax 401k and IRA accounts, use the opportunity to convert pre-tax IRA monies to Roth IRA monies.

  • Tax loss harvesting. Short- and long-term capital losses can be taken before year-end and carried forward indefinitely to offset capital gains in future tax years. Ask your financial adviser to help you consult with your tax adviser on this and all these strategies.
  • Roth IRA conversions. For savers with healthy balances in pre-tax 401k and IRA accounts, use the opportunity to convert pre-tax IRA monies to Roth IRA monies. Converted amounts count as taxable ordinary income, so use current depressed values to lower the tax burden of a Roth IRA conversion.
  • Roth 401k contributions. For really any saver with access to a 401k or 403b (no income limits), there are reasons to consider contributing all or part of the contributions to the Roth (after-tax) 401k or 403b. The future benefits of Roth monies are outlined in the colorful document in the sidebar, The 401k Trap (click for more info).
  • IRA withdrawals before RMD age but after age 59 1/2. For savers over the age of 60 who have accumulated large (over $500,000+) values in pre-tax IRAs, consider removing/withdrawing calculated amounts today, again at depressed values, and paying the taxes today. This strategy when done in conjunction with a tax adviser’s calculations can lower the burden of future RMDs and their tax consequences.
  • Interest on cash balances! Finally, the normalization in interest rates that has resulted from US Federal Reserve interest rate hikes is not all bad. Savers deserve to be compensated for eligible cash balances in bank and brokerage accounts. Take advantage of low-cost, daily liquidity money market investments currently paying nearly 3%. Note: money markets are largely NOT FDIC insured.
  • Short-term US Treasuries finally have respectable yields. For terms ranging from two months to two and three years (and much longer too) cash can be invested and currently receive rates over 3% to 3.5% whereas about 3-4 months ago, rates were near zero. There may be slight tax advantages to owning US Treasuries.

Making the best of down markets is a strategy too.

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