Strategies to Make Most of Current Financial Markets
Whether you hear it called a downturn, a down market, a pullback, or a market correction, it does not change the fact that when we see the value of our life savings going down with each new financial statement, it makes us nervous and uncomfortable.
However, these downturns are an important part of the market cycle and in turn, can provide great opportunities for your investment portfolio looking forward. Here are some strategies and thoughts that I am sharing with my clients to help them understand what’s going on in the economy, as well as take advantage of our current market conditions.
- Buy the dip. When quality investments are bought at a lower price, it reduces the overall risk to your portfolio in the long term.
- Consider Roth conversions. Many dollars are being held tax deferred, which means we are growing our money, as well as Uncle Sam’s. Converting some of those tax-deferred dollars while the values are down can help people take advantage of tax-free growth on the way back up.
- Harvest losses. Selling underperforming investments that were either bought too high or were not fundamentally sound is a good way to reap a tax benefit. Harvesting losses can reduce capital gains and potentially offset up to $3,000 of your ordinary income. Anything above $3,000 is carried over to the next tax year for your benefit, as well. Use the proceeds from the harvest to reinvest in higher quality or better valued investments.
- The federal funds rate is important to our markets. This rate is set by the Federal Open Market Committee (FOMC), the policymaking arm of the Federal Reserve System. This is the suggested rate that depository institutions (banks) use to borrow and lend reserve cash to one another. It has been 0% since the housing crisis of 2008, helping our markets grow significantly, especially in the growth-style investments. When the Fed funds rate is raised, it slows market growth and helps curb inflation.
- Let’s get real. People grew very complacent with the market over the last decade due to low volatility and great returns. Moving forward, investors need to understand that there may be a few years of much lower returns due to currently rising interest rates and inflationary concerns. Investments that have solid underlying fundamentals and have withstood the test of time could be the winners moving forward.
If you view the market cycle like any other life cycle, there are stages. Understanding these stages and learning where the opportunities lie within each one can help protect and grow your life savings or investments. It won’t always be easy and it won’t always look pretty, but if managed correctly, it helps you reach your goals sooner rather than later.
Black Lab Financial Services