Investing In A Down Market & Bear Market Strategies

TRICKS OF THE TRADE

Prepared by: Kyle Ryan, CFP® & Michael Menninger, CFP®

Navigating a Historical Bear Market & Investing Strategies for 2024

This year is shaping up to be one of the worst in U.S. history for the performance of a balanced 60% stocks and 40% bonds portfolio. The rapid onset of inflation, subsequently followed by interest rate hikes by the Federal Reserve and coinciding with geopolitical events unfolding worldwide has left the market in a fragile state – filled with fear and uncertainty. With the market in such a frenzy, many investors are wondering what strategies they can use to take advantage of this historical bear market. In this article, we will review investment management strategies that investors can use to seize the opportunity of a down market.

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What Are the Smart Investment Strategies for a Bear Market?

In a bear market, where stock prices are falling and investor sentiment is generally negative, it's essential to adjust your investment strategy to protect your portfolio and potentially even capitalize on the downturn. Here are some smart investment strategies for navigating a bear market.

Roth IRA Conversions

We have covered Roth IRA conversion in previous Tricks of the Trade articles and on TV episodes of ‘Financial Planning: Explained’, but the value of a Roth IRA Conversion is even greater in a down market. If one wished to convert funds from a Traditional IRA / 401(k) to a Roth IRA / 401(k), he/she would be able to convert (and pay tax on) more shares for the same dollar amount due to the fall in stock and bond prices. When the market recovers, investors will participate in the recovery in their tax-free Roth IRA, thus maximizing the value of the conversion.

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Investment Diversification

Investment diversification is a strategy investors use to spread their investment capital across various asset classes, industries, and geographic regions. Diversification aims to reduce the overall risk in a portfolio by avoiding overexposure to any single investment or market segment. By allocating investments across different types of assets, such as stocks, bonds, real estate, and commodities, investors can minimize the impact of negative performance in any one asset class.

For example, if one asset class experiences a decline in value, investments in other asset classes may offset those losses, resulting in a more stable overall portfolio performance.

Tax Loss Harvesting

Investors with non-qualified investment accounts that have unrealized capital losses can take advantage of a down market by selling investments that are down and receive a tax deduction for the loss. The proceeds of the sale must not be reinvested in that same investment for at least thirty days to qualify for the tax deduction. The proceeds can, however, be reinvested into another investment or left in cash in the meantime. These losses can be written off against your income or against capital gains that may be incurred in the future. This can be a powerful way for investors to take advantage of a down market and save money on taxes. Note that the IRS limits the amount of capital losses to $3,000 on your tax return each year, but excess losses can be carried over to future years.

Dollar Cost Averaging / Limit Orders

Strategies for Investing in a Volatile Market

The adage, ‘buy low and sell high’, seems obvious, but is quite difficult to put into practice. The impact of emotions on investing tends to get in the way of this, as history has shown that the best time to buy into the market is when investor sentiment is at its worst. How can one overcome the emotional battle of buying into what seems like a free-falling market?

How Can Dollar Cost Averaging Help Investors Overcome Market Fear?

A good option for investors is a strategy called dollar cost averaging (DCA), which is when one invests his/her money in equal amounts at regular intervals, regardless of which direction the market is moving. Over time, this can help investors acquire more shares of an investment when the price is low, and purchase less when it is relatively higher. This is particularly effective in a volatile market, as it removes the emotional resistance to purchasing and helps establish a habit to focus on the long-term objective of the account.

How Limit Orders Empower Investors?

An alternate option for investors in a volatile market is to set limit orders below current market prices. A limit order allows investors to enter the market only if his/her investment of choice reaches the set limit price. This can be advantageous for investors who wish to participate in the market, but only by getting in at a price he/she deems attractive.

Get Expert Guidance for Investing in a Down Market

During a down market, emotions like fear and uncertainty can lead to impulsive decisions that may not align with long-term financial goals. Our experienced financial advisor can offer perspective and calm rationality, helping investors stay focused on their objectives amidst market turbulence.

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About the Author: Michael Menninger, CFP®️

Michael Menninger is the founder and president of Menninger & Associates Financial Planning. With 20+ years of financial planning experience, Michael helps his clients pursue their financial goals through a hardworking, common-sense and detail-oriented approach to financial planning. He provides personalized service, builds lasting relationships, and maintains a disciplined, long-term outlook. He uses his experience and wide-ranging business and educational background as a basis for creating financial plans unique to each client's goals and aspirations.

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