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Four Planning Strategies to Leverage in a Bear Market

Before March 2020, we experienced the longest bull market in history. It is painful to see it come to an end, not to mention the pain we’re experiencing as a nation and a globe because of COVID-19. While we’re cautious not to make light of that pain, we also need to be disciplined to make prudent decisions with our wealth. 

Bear markets present planning opportunities that (thankfully) don’t come around very often. Below are just a few.

Roth Conversions

When you convert Traditional IRA dollars to a Roth IRA, you pay ordinary income taxes on the amount converted, but then those dollars grow completely tax free in the Roth IRA. A conversion can make sense if you think you are in a lower tax bracket now than you’ll be in retirement and/or if you have a desire for your heirs to someday inherit a bucket of tax-free dollars (Roth), rather than taxable dollars (Traditional IRA). If Roth conversions are a good fit for you, doing so in a bear market can work to your advantage because you’re able to inject dollars into the Roth IRA that can then grow tax-free as the market recovers. 

Tax Loss Harvesting

When you sell investments that have grown or appreciated in a taxable brokerage account (non-retirement account), you will generally have to pay taxes on the gain that you realized. If you sell investments in a taxable brokerage account that are down in value, you can use those ‘losses’ to offset current or future gains realized elsewhere – or up to a certain amount of other tax liability. Generally, when you tax loss harvest, you sell something and buy another position that is similar, but not the same. This allows you to remain invested in like holdings as before, all while locking in a loss that can reduce your tax liability. Be careful of Wash Sale rules. 

Putting Cash to Work

A popular dinner table conversation right now is whether or not this is the time to pull cash off the sidelines and buy into the market at “discounted” prices. This could absolutely be a great time to ‘buy’, but be cautious not to be greedy. Make sure that you’re not putting money into the market that you’ll anticipate needing in the next 12-18 months. Doing so could put you in a cash squeeze down the road by locking these dollars up in riskier assets.

Portfolio Rebalancing

Given the dip in the market, it’s likely that the original mix of investments you held in your portfolio is a bit out of sorts. Re-aligning your portfolio by selling off bonds and reinvesting those dollars back into the equity market can help you stick to the fundamentals of your risk preferences. The big advantage – it allows you to invest in the market while it’s ‘low’ and ride the recovery when it comes. 

The reality is that this is a painful season. But we can’t let pain or fear stop us from making wise and prudent investment decisions. Each of those decisions has to be contextual to your situation. That’s why leaning on your advisor in seasons like these is so important.

For informational purposes only. Not intended as legal or investment advice or a recommendation of any particular security or strategy. Information prepared from third-party sources is believed to be reliable though its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice. For more information about Wealthquest, including our Form ADV Part 2A Brochure, please visit https://adviserinfo.sec.gov or contact us at 513-530-9700.

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