The investing landscape can feel pretty gloomy these days. Inflation is up, stock and bond prices are down, central banks are aggressively raising interest rates, and talk of recession seems to be everywhere. Investors looking for silver linings among all the clouds overhead could feel hard-pressed to find one.
Often, the best way to approach a daunting environment is to remain focused on your goals. If you don't have to sell anything, you won't necessarily have to suffer any real losses. And if you can stick to an investing plan, you might be able to pick up some assets at prices better than we've seen in a while—so long as they fit with your strategy and goals.
However, patience isn't the only response. In fact, certain moves could make more sense during a bad market than during a good one. To be clear: This isn't a call for investors to try to time the market by jumping in when they think asset prices are at their lowest or out when they're at their highest. Rather, the moves we'll cover here focus more on tax planning and portfolio maintenance for the longer-term investor.
So, what silver-lining moves do we see?
- Look for opportunities for tax-loss harvesting. Investors often want to avoid selling anything at a loss, but selling a losing position can mean significant tax benefits if you have capital gains or income to offset. Why? You can use your losses to lower your capital gains all the way to zero. And if you have more losses than gains, you can offset up to $3,000 of your ordinary income each year. Tax-loss harvesting can also be an opportunity to sell underperforming investments or to re-diversify overly concentrated stock positions (just be aware of wash sale rules).
- Bump up your retirement savings. Down markets can be a good time to contribute more to your 401(k) or individual retirement account (IRA), as your dollar goes a lot further when assets are selling at depressed prices. If you're the kind of person who typically waits until the end of the year to make an IRA contribution, consider doing so earlier, so you can have more time in the market and position yourself for any potential recovery. And if you have more cash in a health savings account (HSA) than you'll need to cover out-of-pocket medical expenses for the next year or two, consider investing those excess funds. Any gains you can earn there could help pay for medical bills in the future.
- Contribute to a 529 plan. Similar arguments apply to funding a 529 college saving plan. You can boost an account's value by bundling five years of annual gift tax exclusion amounts—totaling up to $80,000 (or $160,000 per couple) in 2022—without reducing your lifetime gift tax exclusion amount ($12,060,000 in 2022).
- Consider a Roth conversion. Converting assets from a tax-deferred IRA to an after-tax Roth account while your account balance is down could help lower the resulting taxes. If the assets recoup their losses later, they could provide additional tax-free growth and withdrawals over time—potentially even enough to offset the tax hit from the conversion.
- Consider exercising incentive stock options (ISOs) while stock prices are down. Investors subject to the Alternative Minimum Tax (AMT) face limits on how many ISOs they can exercise before sacrificing some of their options' tax advantages. (In short, the spread between the stock's fair market value and the exercise price of the option could be treated as income in the tax year you exercise your options, potentially leading to additional taxes.) When markets are down, however, you can exercise more ISOs while staying under the AMT exemption ($75,900 for single filers or $118,100 for married filing jointly in 2022). Equity awards can be complicated, so make sure you check with your equity compensation planner and tax advisor before making any moves.
Again, if you're sticking with your plans and can handle seeing a smaller number on your account value, you may not need to do anything when the market falls. It's never a good idea to act for action's sake, especially if there's a chance that doing so amid the turbulence of a rough market will make it harder for you to participate in any future recovery or accomplish your most important financial goals.
Sometimes, though, a bad market can actually be an opportunity to set yourself up for something better later on.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, or investment manager.
Investing involved risks including loss of principal.
Diversification strategies do not ensure a profit and do not protect against losses in declining markets.
Neither the tax-loss harvesting strategy nor any discussion herein is intended as tax advice and does not represent that any particular tax consequences will be obtained. Tax-loss harvesting involves certain risks including unintended tax implications. Investors should consult with their tax advisors and refer to Internal Revenue Service (“IRS”) website at www.irs.gov about the consequences of tax-loss harvesting.
Roth IRA conversions require a five‐year holding period before earnings can be withdrawn tax free and subsequent conversions will require their own 5‐year holding period. In addition, earnings distributions prior to age 59 1/2 are subject to an early withdrawal penalty.
As with any investment, it's possible to lose money by investing in a 529 or other educational savings plan. Additionally, by investing in a 529 plan outside of your state, you may lose tax benefits offered by your own state’s plan. State tax treatment of earnings may vary.