Market Turbulence & Strategies

This year has been a terrible one for markets. Inflation not seen in a generation, a war in Europe affecting food and energy supply chains, and political divisions here at home have all collided together.  This perfect storm has contributed to a higher degree of uncertainty as we move past the pandemic. Although the markets continue to face headwinds and things could get worse before they get better, during times like this I rely on market history to put what we're going through today in context.

Past studies have shown trying to time the market (getting in and out) tends to worsen long-term performance because investors miss the biggest upswings when things start to get better (which they will). In fact, it is not unusual to have corrections and occasional bear markets. These are reactions, or really market anticipations, to the economy right-sizing the excesses before it can embark on the next leg of growth. This time is no different. 

However, there are strategies you can potentially benefit from today that can have a positive long-term impact on your finances.

• Dollar Cost Averaging is when you invest a fixed amount on a regular basis to take advantage of the market ups and downs. During down markets your fixed amount purchases more shares; during up markets your fixed amount purchases less. Over time your purchases will average between the highs and lows. This strategy provides a consistent approach to investing and avoids trying to time the market.


• Tax Loss Harvesting is when you sell underwater investments to purposely realize a loss. The loss can be applied to other investments sold at a gain to reduce or net out capital gains taxes. This is a great strategy if you want to reduce a concentrated stock position, which I define as a holding of more than 5% of your portfolio, with substantial unrealized gains. You can also bank the losses and apply them to future portfolio gains or apply up to $3,000 as a tax deduction annually until all losses have been applied.
  
  You can remain invested in the markets by purchasing other stocks or funds if they are not substantially identical to the securities you sold. If you get back into the same stock, for example, within thirty days of selling it, the sale would be subject to the wash sale rule which disallows the capital gains offset. If you are interested in this strategy, consult with your financial or your tax advisor before you make any moves.


• Roth Conversion is another strategy where you can convert a portion or all of your tax-deferred holdings in a traditional IRA to a Roth. You will still need to pay taxes on the conversion but the tax bite would be lower with the current depressed values. Funds in a Roth can grow tax free. The viability of this strategy depends on your current and expected future tax rates. Ask your financial or tax advisor whether this would work for your particular situation.

No one knows for sure what lies ahead, but if history serves as a guide there will be better times. It's a question of when.

^{No strategy assures success or protects against loss.}

^{This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2024 Advisor Websites.}