So far, 2020 has been an eventful year in the stock market, swinging from market highs early in the year to panic lows, back up again. With this unusual activity, uncertainty has remained high, which can be concerning when you’re trying to protect and build your wealth.
But fortunately, when uncertainty and volatility arrive, opportunity always comes along with it—if you’re prepared to act.
In this case, here are two opportunities to turn today’s market volatility into a better end result.
Strategy 1: Tax Loss Harvesting
If you have a properly diversified portfolio, you probably will have some positions that you are holding at a loss. In that case, there’s a tax strategy that can help you get those losses working for you.
If you have a position that is currently at a loss in a taxable account, you can sell it so you create a realized loss. That loss will then offset other gains you may have, either in other stocks or in other assets.
Even if you don’t have other investment gains, you can use up to $3,000 of that loss per year to offset taxable earned income. If you can’t use it all this year, that’s no problem either; the remaining loss can be carried forward to future years.
But here’s what’s really valuable about this strategy: The tax code contains a “wash sale rule” that prevents you from using that loss if you buy back that same or a “substantially identical” investment or fund within 30 days. This leaves open the possibility for you to buy a “tax swap,” which is a purchase of a similar, but not identical, position. That can allow you to maintain that exposure in case the market recovers in the meantime. Then after the 30-day period has passed, you can decide whether to keep the current position, or you are free to sell it and buy back the original security.
This strategy can help you lower your tax liability and still allow you to participate in a market recovery.
The higher your income tax liability, the more valuable this strategy can be.
Like with any tax strategy, there are some very specific rules to follow, so we recommend that you work with your tax professional to make sure the details are handled correctly.
Strategy 2: Keep Buying when the Market Drops
Market volatility can be very stressful at times. A very common reaction to it is to stop investing any new money. While the thinking is not unreasonable (“everything’s nuts right now, so we’ll wait and see before putting more money in”), in reality, you’ll often miss some of the best bargains that way.
So if you’re investing a specific amount every month in the market, it’s usually smart to continue doing so. During market drops, you can get far more shares for the same amount of money, lowering your cost basis.
This is where market psychology gets interesting: this is not easy to do. In fact, people often avoid stocks when they are on sale. Where on the planet do you see people ignoring sales and instead lining up to buy when prices are higher?
That shows the power of this natural bias, to fear low prices in the market, even though buying low is actually a lower-risk strategy.
The key is to get past all of the fear so you can objectively evaluate opportunities.
“You make most of your money in a bear market; you just don’t realize it at the time.”
—Shelby Cullom Davis, Investment Firm Founder
Feel the Fear and Do It Anyway
One good way to strengthen your resolve is to stay focused on market history. History shows us that bear markets happen periodically and are a completely natural part of investing. What’s key is that that same history shows us these bear markets on average are much shorter than bull markets.
According to data from First Trust Portfolios, going back to 1926[i]:
- The average bull market lasts 9.1 years, with an average cumulative return of 476%.
- The average bear market period lasts 1.4 years, with an average cumulative loss of 41%.
Getting Outside Help
That said, it is very difficult to bring yourself to act when stocks drop and bad news is everywhere. That’s where your financial advisor can be of help to you. A quality advisor can help you objectively identify risks and opportunities for you in difficult markets.
But sometimes there’s another problem: not all advisors are available to help you during these times. Some are struggling with market volatility, too, or some just don’t have business models that are focused on you achieving your goals.
So if you’re not getting proactive help when you need it, maybe it’s time to consider getting a second opinion.
Is it Time to Get a Second Opinion?
Your money is important to your future, so it’s critical not to just assume things are being handled correctly for you. Instead, consider getting a second opinion. It doesn’t normally cost you anything, since most financial advisors and wealth managers offer a free consultation.
Either way, getting an objective opinion can either alert you to potential risks or help you sleep better knowing you are invested in a way that fits your risk tolerance and goals.
Avoid Making an Expensive Assumption
With your busy life, it can be easy to just assume things will be fine and skip the second opinion. But the more you have now, the more you have to lose. So why not invest a little time to make sure your money (and your future) are on the right track.
Get a Free Second Opinion
Arroyo Investment Group, a GIPS® compliant wealth management and financial planning firm serving investors nationwide, offers a free Second Opinion service. Simply sign up and we’ll be in touch to schedule a phone (or in-person) meeting. Don’t worry…there’s no pressure or stream of calls afterward. You may receive an occasional email after, but you are free to opt out at any time.