Don’t let fear drive your decisions, even in a bear market. What investors should do next
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It can be frightening to see your portfolios fall, but investors shouldn’t give in to the temptation to sell everything and run for cash. The S & P 500 has tumbled 18% this year and briefly fell into a bear market during Friday’s session — a decline of 20% from its highs. Nasdaq Composite has dropped by over 29%, despite being in a bearmarket. Blair duQuesnay is an investment advisor with Ritholtz Wealth Management. He said, “Preparing for the decline in your portfolio is like putting up your armor and preparing to fight so it’s no shock.” Instead of letting fear dictate your choices, follow these steps. Selling intelligently will reduce your tax bill. Tax loss harvesting means that you sell off losses in your taxable brokerage account, and use them to offset capital gains elsewhere in the portfolio. If losses exceed gains you may be able to offset income with up $3,000 per annum. Do not just keep the money from sales. Brenna McLoughlin from Wealthstream Advisors, said that you should “trade the position at loss and invest in something else that will expose you to the market similarly.” By doing this, you can keep your targeted asset allocation. Be careful about choosing the investment investments that will replace losers from the sale. The IRS won’t allow you to deduct tax losses from a loss position if, within the 30 day period before or after the sale of the securities, you purchase securities substantially similar to the ones you just sold. This rule is called the wash-sale principle. There will be a range of options for finding a replacement. McLoughlin said that it is possible to buy millions of other funds to replace a U.S. large capital fund you are trying to sell. This may prove more difficult for bond funds, which are based on different benchmarks. Additionally, investors must weigh credit quality and duration when selecting substitutes. Your portfolio should be rebalanced after the market boom of 2008. This led to large stock weightings. Rebalancing your portfolio allows you to keep your asset allocation in check. duQuesnay stated that this situation was unusual because both stocks and bonds have been down. Therefore, rebalancing is not an easy task. She said that you should find the top winners and make some profits. The S & P 500 energy sector is up 46% for the year and includes good contenders. You can invest the proceeds to get your portfolio back on track. You could buy stocks at fire sale prices. This is how to buy low, and consistently sell high with no guesswork,” duQuesnay explained. Are you an IRA owner? It can be converted to a Roth IRA. Roth IRAs are a great way to save tax. A traditional IRA allows you to invest pretax or tax-deductible dollars over time, but withdrawals are subject to ordinary income taxes — plus a 10% penalty tax if you’re under age 59½. You will pay income taxes if you convert your account to a Roth IRA. This account can grow tax-free, and you may withdraw it without paying taxes. The Roth conversion is especially attractive when there are market crashes. According to duQuesnay, “If your IRA is worth less than a Roth, then you will have to pay tax on that lower value.” You’ll be able to enjoy the stock market recovery and your Roth account will benefit from that appreciation tax-free. She added that to be long-term investors is to both be short-term pessimists and long-term optimists. Stay invested by sticking to your plan.
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