3 ways to profit from the stock market crisis
- Watching your portfolio fall is painful, but you can take strategic action during a bear market.
- Do a Roth conversion now if you’ve thought about it – you’ll end up paying less tax.
- This is also a good time to increase your contributions and look for opportunities to reap tax losses.
To say that the stock market has been stuck in a rut lately is an understatement. And while it can be quite shocking to see your investment returns fall further and further from last year’s highs, a
doesn’t have to be all bad. In fact, for sophisticated investors, steep market declines often provide a chance to be opportunistic and take advantage of high-quality stocks.
There’s nothing wrong with the conventional wisdom of holding on and weathering bad market cycles. But for those with an above-average tolerance for risk, as well as the ability to take on additional financial risk, a bear market presents a great opportunity to be strategic and capitalize on what’s happening.
Below are three ways to take advantage of a bear market and position yourself for an eventual recovery.
1. Run a Roth Conversion
If you’ve been considering this strategy for a while and hold investments in a traditional IRA, now might be the time to consider a Roth conversion. This is because a bear market means your account value is likely lower, and performing a Roth conversion at that lower amount means you will pay less tax than if you waited for the market to recover.
Additionally, a possible market rally would help you recoup what you will end up paying in income taxes as a result of this conversion. And if you believe the market will one day rally to its highs and continue to rise over time, executing a conversion while in a bear market essentially allows you to choose for that rally to occur inside your tax-free bucket rather than in your tax-deferred.
When considering a Roth conversion, it’s always important to consider whether the increased revenue will push you to the next one.
for the year and whether you will be able to wait for the five year rule before you need to access Roth funds. However, for those with both a long-term horizon and the ability to weather any future market shocks, the current bear market cycle may present a great opportunity to create a pool of tax-free assets for yourself. in your years to come.
2. Take advantage of tax-loss harvesting
Investing in a rental property or a small business can provide you with solid cash flow, cover your expenses and earn you a profit at the end of each year. But when these assets are sold at a profit, they often produce significant long-term profits.
obligations for their owners.
If you have substantial gains, perhaps from the sale of rental property or a business, selling some of your most downcast stocks that you don’t expect to recoup anytime soon is another way to take advantage of the market. current bearish. . Sell these losers at a time when you make sense
elsewhere in your portfolio is what is known as the tax-loss crop.
Even in bull markets, not all investments will be winners. Fortunately, a losing investment often gives you a tax advantage. Harvesting tax losses allows you to remove these losers from your portfolio and put them to good use, reducing your tax liability for the year.
3. Increase your dues
If you find yourself strapped for cash and looking for a good use of those funds, another way to take advantage of a bear market is to simply increase your contributions to your investment accounts. Whether it’s increasing your contribution percentage to your workplace retirement account or funneling those funds into your brokerage account, adding a few extra dollars while the market is down will help you buy more stocks at lower prices. lower.
There’s a reason CEOs and other senior executives of publicly traded companies tend to claw back a large chunk of their company’s stock during market downturns when they believe they’re significantly undervalued. This is essentially what you would be doing by buying more of what you consider to be a high quality, long-term investment during a bear market.
This is a simple buying average that can help you build a position in your preferred investment over time, while simultaneously lowering your average buying price.
Of course, no one knows exactly when the bear market will end and a subsequent stock market rally will begin. But, by being strategic and taking advantage of the opportunity presented by this current market cycle, you can position yourself to come out on top once the market recovers.