The bear market may have many investors concerned about their finances. It’s disconcerting to watch your portfolio dwindling, even if you know you have some time until retirement — when you’ll need to begin taking money out.
However, you can make a bear market work to your advantage in a few ways.
Use Dollar-Cost Averaging (DCA) to Minimize Risk
“Buying when the stocks are down is a great way to get a stock for a ‘discount’ so that you’ll profit more in the long run. I always tell my clients, the lower you buy, the higher your returns are over time,” said Michael Boggiano, managing partner at Wealthcare Financial, in an exclusive email interview with GOBankingRates.
While it can be challenging to try to time the market and find the bottom for any given stock or investment, dollar-cost averaging can help level out the risk. When you use this strategy, you’ll divide your total investment amount over time, buying more stocks at periodic intervals as the price drops. Ideally, you’ll reduce the overall average cost of the stock.
This can work especially well for new investors who may not have a lot of money to invest right away. “If you’re someone just getting started, we recommend starting by investing 15% of your income before tax,” said Shuan Tarzy, Boggiano’s colleague at Wealthcare Financial. “We like to encourage people to just start investing even if it’s with just $10 a month.”
Use Tax-Loss Harvesting to Reduce Capital Gains
In most cases, you want to avoid selling in a down market. For new investors, holding investments can work to your advantage as you can avoid paying capital gains tax at the highest rate, which can be as much as 37%. “If you hold stocks for over a year, you only pay 15% on your capital gains,” Tarzy said.
However, you can also offset capital gains tax (and personal income tax, if necessary) through a process called tax-loss harvesting. This strategy is “one of the silver linings in a bear market,” Christine Benz, director of personal finance and retirement planning for Morningstar, told Yahoo! Finance in a video interview.
If you have a number of taxable investments that are consistently taking a loss — and you don’t have faith that they will rise when they market reverses — you can sell them. “Then you can use that loss to offset gains elsewhere in your portfolio,” Benz said in the interview.
However, there are a few caveats to be aware of, according to Benz. First of all, she said, “You can’t rebuy that same security within 30 days of having sold it.” You also can’t reinvest the money into a “substantially identical security,” she said, such as trading one S&P 500 ETF for another.
Switch to a Roth IRA for Tax-Free Withdrawals
If you have money in a 401(k), it might be a good time to convert it into a Roth IRA, Benz advised. “The advantage of doing so when the market has dropped is that your balance has dropped. And the taxes due upon making these conversions would be less than when the market was higher,” she said.
You’ll gain the advantages of tax-free withdrawals in retirement with no mandatory minimum distributions.
However, there is one circumstance where you’ll want to keep your 401(k) going strong. “If you have an employer 401(k) match, you should always max that out to get your full employee benefits,” Tarzy told GOBankingRates.
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