Like everything in life, things don’t always go our way. We sometimes lose the championship game. We miss out on getting the perfect client. Or it rains on the day that you’re hosting your brother’s friend’s sister’s outdoor 30th birthday party. Not everything works out the way we would like it to in life.
The same thing can be true for our investments. Because if you haven’t figured it out by now, the market doesn’t just always go up. Even the best investments go through tough periods and corrections, and we are forced to make decisions. But just as the title of this blog infers, there are opportunities to take advantage of investment losses and market downturns and use them to better position yourself moving forward. Here are some ways in which you could take advantage of a down market:
Re-balance
When the market is down and your investments are down, it could be a great time to take advantage of this return to your desired allocation and risk tolerance. For example, you have a target of holding a minimum of 5% of ABC investment and because the market is down, maybe this investment has dropped to a total of 4% in your portfolio. You have strong conviction of this investment; therefore, it could be a good opportunity to buy this investment at a lower price and return its allocation to at least 5%. This will not only get you back to the right allocation, but potentially and hopefully, allow you to participate in this investment’s recovery in the future.
Tax-Loss Harvest
When an investment is down and has losses, it could be a great time to tax-loss harvest. This is a great strategy that many use in brokerage and taxable accounts. Tax-loss harvesting is simply selling an investment at a loss and using it to offset either gains in their portfolio or potentially reduce some of their income for the taxable year.
For example: imagine you hold investment ABC and it currently has a $3,000 loss. You also hold XYZ investment that has a $3,000 gain and you would like to sell it but don’t want to pay the taxes on it. “Tax-Loss Harvesting enters the chat”. You can sell position XYZ as well as selling investment ABC and net to $0 in tax being owed ($3,000 gain minus a $3,000 loss = $0 tax owed.) Beautiful, right?
You may even be able to offset a loss against your income. As of 2023, you can reduce your taxable income by a maximum of $3,000 per year if you have a Net loss in your taxable portfolio.
If you are considering this strategy, make sure you also consider:
- Holding period of your investment. The investment is taxed differently depending on if you have held it for more than a year, or less.
- Type of account. This strategy can only be used in taxable accounts. Retirement accounts often have no tax consequences until the money is being distributed.
- Income. Your income level may affect your ability to take losses against your income.
Remove Undesirable Investments
We’ve all made mistakes along our investment journey. Sometimes we choose winners and other times we pick a stock or fund that does so poorly that we want to cry.
Maybe the investment has done poorly because of the market cycle we are in. Maybe it has done poorly because of the timing that you made the trade. Other times it is just a bad investment that we should never have bought in the first place. Again, it’s okay to remove a position because you no longer believe in its long-term potential. You don’t have to wait until it returns to the price you bought it at. Swallow your pride and sell it now, and move into something you truly believe in.
Do Nothing
That’s right. You could do nothing. Sometimes your portfolio is perfectly balanced and holds the right position of each investment that you would like to hold. Just because you are down, it doesn’t always suggest that you need to make a change to your portfolio. It could possibly just mean that the economy is going through a change or something out of your control is occurring and the whole market is struggling. Maybe it’s time for you to just sit tight and let time in the market do its job for you?
So, there you have it. 4 strategies or ideas to take advantage of a down market. Down markets and corrections happen regularly so it’s important to have a strategy and understand how you could possibly take advantage of it.
Speak to your Financial Advisor to find out how best to capitalize on a down market.