Let’s talk about opportunities in a downturn.

While we can’t predict a market downturn in advance, we certainly can be prepared for one. With the market recently in the doldrums, now may be a good time to review the opportunities we can exploit when others rush for the door.  

The first one to come to mind is tax-loss harvesting; that is, selling positions that have gone down below one’s cost, booking a loss for tax purposes, and then buying a similar (though not identical) investment that is probably also on sale due to the bearish conditions. The investor retains an almost equivalent market exposure but now has a loss to offset gains or income (up to $3,000 of income) on next year’s tax return.

Another opportunity is a Roth conversion. That means paying taxes on the value of the shares or cash moving from the IRA into a Roth today so that you won’t have to ever pay taxes on that money again. You’ve probably read that if you expect to be in the same or lower tax bracket in the future than you are today, then a Roth doesn’t make tax sense. But if you can make the conversion at lower valuations, then the tax bill is lower today than it would be if the money was taken out after the market recovers. Also, some of us believe that tax rates have nowhere to go but up.

People who are making annual gifts to their children or heirs can get some leverage in a market downturn.  Each of us can transfer $17,000 this year to others without paying a gift tax. If you were to transfer investments that are temporarily undervalued, then that $17,000 in depressed ETFs could be a more valuable gift when the market recovers.

Finally, when something goes on sale, it’s often a buying opportunity. For some reason, this is how people think when retail or online stores offer discounted prices, but when stocks go on sale, most investors think sell rather than buy. However, buying at depressed prices is always a good strategy, long-term, for savvy investors.

Of course, if your portfolio is being professionally managed, all these opportunities are presumably being explored without you having to give them a thought.

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