Opportunities in a Downturn

Planning Article

October 2023 – By Bob Veres

We obviously can’t predict a market downturn in advance, but we can certainly prepare for one.  With the markets in a bit of a doldrums the past month, that preparation may come in handy in the fairly near future.

Whenever stocks go down, it opens up a surprising number of (usually temporary) planning opportunities for the alert investor.  Perhaps the most obvious is harvesting losses; that is, selling positions that have gone down, booking a loss for tax purposes, and then buying a similar (but not identical) investment that is probably also on sale due to the bearish conditions.  The investor retains an essentially equivalent market exposure, but now has a loss to offset gains or income (up to $3,000 of income) for the year they have realized the loss.

Roth conversions could also be beneficial during a market downturn, as you could convert a higher amount of shares of a declining investment that are held in a tax deferred account into a tax-free account. That means paying taxes on the value of the shares or cash moving from the IRA into a Roth today, so that you won’t have to ever pay taxes on that money again.  You’ve probably read that if you expect to be in the same or lower tax bracket in the future than you are today, then a Roth doesn’t make tax sense.  But if you can make the conversion at lower valuations, then the tax bill is lower today than it would be if the money was taken out after the market recovers.  And some of us believe that tax rates have nowhere to go but up.

People who are making annual gifts to their children or heirs can get a little leverage in a market downturn.  An individual can gift up to $17,000 per recipient before having to dip into their lifetime exclusion of gifts or pay a gift tax, and this amount doubles to $34,000 if you are married and elect to split the gift. If you were to transfer investments that are temporarily undervalued, then that $17,000 in depressed ETFs could be a more valuable gift when the market recovers.

And finally, when something goes on sale, it’s often a buying opportunity.  For some reason, this is how people think when retail or online stores offer discounted prices, but when stocks go on sale, most investors think sell rather than buy.  But buying at depressed prices is always a good strategy, long-term, for savvy investors.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. Although general strategies and / or opinions are revealed, this post is not intended to, nor does it represent or reflect, transactions or activity specific to any one account. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All data and information are gathered from sources believed to be reliable and is not warranted to be correct, complete or accurate. Investments carry the risk of loss including loss of principal. Past performance is never a guarantee of future results.