4 Strategies to Make the Most of a Stock Market Downturn | Smart Change: Personal Finance

(Sam Swenson, CFA, CPA)

with the Standard & Poor’s 500 Down more than 10% in 2022, many investors panicked, which is quite understandable for several reasons. The good news is that there are still opportunities – even when the market is down – to maximize your net worth in the long run.

If you have a penchant, it may actually make sense to improve your portfolio when the market is down. Fortunately, there are some worthwhile strategies for both investing and taxation in your portfolio, so you will have a chance to improve your financial situation on multiple dimensions.

Here are four strategies for making the most of a stock market slump.

1. Buy more

Some investors choose to completely ignore the market, leaving their usual system 401(k) And automated IRA deposits alone – although ratings are low. This is a great strategy: by constantly adding to the nest egg at low prices, you can accumulate more lots than you would if the market was higher. When the market recovers, you will be better off than if you stopped investing.

Additionally, if you have the funds available, spreading them out during an economic downturn makes sense; Many investors wait for these moments to put the extra money to work. Although it may be Feeling Counterintuitively, buying when stocks are flashing red is likely to make you richer in the long run.

2. Don’t look too much

Looking at a falling portfolio is disconcerting, whether you’re just starting out or (maybe especially) if you’re already a millionaire. Watching your wallet fall can leave you feeling discouraged, which in turn can stop you in your own path when it comes to buying more.

This relates to the broader thought of controlling what you can control. Global stock valuations will rise and fall with or without anyone’s permission, but you alone control your day-to-day behavior. Constantly refreshing your wallet You are likely to do more harm than good when it comes to your trading actions, so make sure you focus on the long term and ease your emotions as much as possible.

Image source: Getty Images.

3. Continue to liquidate debts

If you carry debts other than a primary mortgage, using the excess money to pay off debt during an economic downturn can give you a sense of accomplishment. This of course assumes that you have Additional income To pay off debt, but to feel that progress is being made even when the market is down is enviable.

The problem with taking on so much debt is that interest will be charged whether the market goes up or down, so prioritizing debt repayment on an ongoing basis will do wonders for your long-term net worth — not to mention your credit score. On the other hand, ignoring debt – especially When the market goes down – it can have a huge negative impact.

4. Tax optimization where possible

Although a bear market will not help the value of your portfolio in the near term, you can secure lower tax liabilities in certain investment scenarios.

Suppose you had a concentrated stock position that you intended to exit, but a large unrealized gain (and thus, a large capital gains tax bill looming) prevented you from selling. A falling market provides the opportunity to sell all or part of your equity position, rebalancing the returns in market index funds.

You’ll still pay tax if you sell at a gain, but you’ll pay less on a proportional basis than if you sold when the shares were near all-time highs. In addition, it will put your portfolio on a better path in the long run through diversification One of the large positions per stock.

Act, but do it strategically

A rapidly declining market can produce very negative feelings, but the worst result is that those negative feelings lead to unwise actions. Downturns in the market are ripe for these mistakes to happen, so it’s good to know what you want It can be done It will make a positive difference in the long run.

By focusing on what you can control – not what you cannot control – you will prepare yourself for better results in the future. Keep buying, don’t look at your wallet too much, pay off debts reliably, and improve taxes whenever and wherever you can.

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