Bear Markets: 3 Innovative Strategies to Consider Implementing

By: Scott Sturgeon, JD, MBA, CFP®

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Let’s face it, in a bear market when your investment portfolios have declined significantly over several months, it’s difficult to get excited about anything investment related. It’s hard enough staying invested when markets are volatile, let alone thinking about various strategies you could be implementing.

For every negative situation though, there is the potential for a silver lining. As part of a comprehensive financial plan, a combination of the strategies below may make sense for your specific situation. If you’re wondering what action you can take in the face of an otherwise dismal time for investing, check out these three bear market strategies.

In this article, we’ll focus on…

• 1. Tax Loss Harvesting

• 2. Roth IRA Conversions

• 3. Buying Equity Investments

• 4. Bonus!

1. Tax Loss Harvesting

Regardless of what things look like from an investment performance perspective, saving on taxes is something many investors can benefit from. Tax loss harvesting is a relatively simple but effective way to take advantage of a bear market to recognize tax losses by selling investments for a loss, then reinvesting the proceeds into different investments. The actual execution of the strategy gets a little more complex and has to be properly implemented to avoid wash sale rules which could potentially negate any benefits. For investors that may be selling a business or otherwise recognizing large gains in their investment portfolio, it can be an efficient way to offset some of those gains in a given tax year. If there are no gains to be offset, you can also write off up to $3,000 of losses towards your taxable income and even carry forward losses to future years.

The amount of tax benefit you experience by implementing tax loss harvesting may vary depending on your taxable income, the tax bracket you fall into, how many gains or losses you have for that tax year in other accounts, and what portion of your portfolio could be used for tax loss harvesting. Remember, tax loss harvesting can only be implemented in taxable brokerage accounts, so other accounts like IRA’s or 401(k)’s won’t work.

For high income earners, tax loss harvesting can be beneficial as each dollar you earn is taxed at higher and higher rates. By incorporating tax loss harvesting as part of your overall financial plan, you may reduce the amount of taxes you owe in a given year, providing a potential benefit in an otherwise challenging bear market.

2. Roth IRA Conversions

The basic idea behind a Roth IRA Conversion is moving your pre-tax Traditional IRA or 401(k) to a Roth IRA where your contributions have already had taxes paid on them. There’s a myriad of benefits to doing so and whether it makes sense is a decision that has to be made on a highly individualized basis. That being said, the number of people that could benefit from converting their pre-tax accounts to a Roth IRA tends to go up as markets go down. Why is that?

The answer of why a Roth Conversion makes sense in a bear market has to do with the amount being converted. When the market is down, any cash you’re investing into equity investments with a longer time horizon can be a lot like purchasing stocks at a discount relative to where they may have been during a recent market peak. By converting funds from your IRA to a Roth IRA, you can essentially invest in your Roth IRA when the market is down, in essence increasing your purchasing power.

3. Buy Equity Investments

You read that correctly. Under the right circumstances, it can actually make sense to invest either a lump sum or in smaller amounts over time as the stock market declines. The reason is that if your investment time horizon is relatively long, it doesn’t really matter what the market is doing in the short term. What does matter is that your dollar today is able to buy more shares of companies than it could during a prior peak of the market. For younger investors, bear markets can actually be beneficial for contributing to workplace retirement accounts like a 401(k) over the long term as they’re effectively buying into a declining market every two weeks as they get paid.

It’s important to note that whether this approach makes sense is going to be highly contingent on your individual financial situation. Should you take all your emergency savings or cash on hand and immediately invest in the market? Probably not, but as Warren Buffett once said, be “fearful when others are greedy, and greedy when others are fearful.” It’s during volatile, fearful or declining bear markets that opportunity sometimes presents itself.

4. BONUS! – Relax and Get Help

If you’re losing sleep or feeling anxious watching your retirement portfolio decline, it may not be a bad idea to seek out help or at least get a second opinion on your current financial plans. Financial planning is all about taking your financial data points today and putting those into the context of what you’re really looking to get out of life, both now and in the future. Without having a comprehensive view of your financial situation and how those data points interrelate, it can be difficult to understand the implications a bear market may have on your financial plans.

Curious to learn more about whether any of these strategies may make sense for you or just want a clearer understanding of where you stand financially? Please contact us at info@oreadwealth.com or schedule time with us directly to discuss specifics of your financial situation and to see if working with Oread Wealth Partners could bring value in working towards your financial goals and objectives.

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