How to Take Advantage of the Turmoil in a Down Market - dummies

How to Take Advantage of the Turmoil in a Down Market

You can’t control what happens in the markets, but you can turn market turbulence into opportunities. Consider actions like these during market declines:

  • Buy more. A decline in prices means investments are on sale. If you’re saving and adding to your accounts, you should be delighted with a down market. You want the value of your holdings to be higher when you retire or when you need them — it doesn’t matter so much what they’re worth now.

  • Rebalance your portfolio at least annually. Market declines can cause your allocations to stray far from your target. To get your portfolio back in line, you buy what’s gone down and sell what’s gone up. Buy low, sell high.

  • Harvest your tax losses. Tax-loss harvesting (selling assets in which you have a taxable loss and replacing them with other nearly identical securities) is a great and legal way to take advantage of the tax code. Just be careful to avoid wash sales — basically, the IRS will disallow your loss if you buy back the same security within 30 days of selling it. This includes mutual funds. You can, however, buy similar mutual funds; for example, if you sell a large cap value fund, you can buy another large value fund immediately, as long as it isn’t the same fund you just sold.

  • Convert traditional IRAs to Roth IRAs. When you convert from a traditional IRA to a Roth IRA, you must pay the income taxes immediately. But you won’t owe taxes later. If converting to a Roth is beneficial for you, it makes sense to do it when the account balance is lower because your immediate tax bill will be lower.

Don’t fixate on income taxes. Fear of paying taxes has prevented more people from taking necessary actions than just about any other reason. If your analysis suggests that selling is required, don’t let the tax consequences stand in the way. Besides, with special rates for long-term capital gains, the tax bill may be lower than you think.