4 Steps to Take in a Down Market


We’re deep into September and the market is down for the year. If you’ve looked at your account balances, you might not feel so great right now. Based on history, we can expect the market to be negative once every five years or so. However, while we cognitively understand that the market does have down years occasionally, it’s difficult to resist the urge to “do something” about it.

But will those actions serve us over the long run? Here are four positive actions you can take during a down market that will pay off in the long run.

1. Calculate Your War Chest

During a down market, you may find it helpful to calculate your retirement “War Chest”. Your War Chest is simply the total amount of cash and bonds in your portfolio. Once you’ve determined the size of your War Chest, divide that number by your total annual living expenses. This tells you how many years your War Chest can support your expenses without having to sell off any of your growth assets.

At this point, it may be helpful to ask how long you expect this down market to last. Remember, it took the S&P 500 seven years to recover after the Great Financial Crisis ended in 2009. That may be a good proxy for a worst-case scenario.

You may find that your War Chest provides more cushion than you expected.

2. Rebalance

The whole point of investing is to buy low and sell high. How do we do that over time? By rebalancing our portfolio. Rebalancing gives us the opportunity to sell a portfolio position that may be up and buy another one that may be on sale.

Now that stocks are down, you may find that you can rebalance your portfolio if the conditions are right. As a reminder, it’s important that you have a rebalancing process and stick to it. During times of high market volatility, the trades you make one day might need to be reversed the next if there are big market swings.

3. Tax-Loss Harvest

If you have a taxable investment account, such as an individual brokerage account or a joint brokerage account, you may be able to tax-loss harvest while the market is down. Tax-loss harvesting is the process of selling something at a loss (as part of your rebalancing) to reduce your capital gains tax liability.

For instance, let’s say you bought $10,000 worth of Facebook stock (or Meta as it’s now called) at the beginning of the year. At the time of this writing, Facebook is down about 60% for the year, which means that your stock is now worth around $4,000.

By the way, have I mentioned lately why it’s important to avoid concentrated positions?

Anyway – if you sold your Facebook stock right now, you’d wind up with a $6,000 loss. That loss could be used to offset any other capital gains you had for the year. For example, if you sold something in January for a $6,000 gain, the tax-loss harvesting of your Facebook stock would mean you’d wind up with $0 in capital gains for the year.

In fact, you can use up to $3,000 in capital losses to offset your ordinary income in any given year. Any capital losses over $3,000 can be carried over to future years to offset future capital gains. Of course, be sure to consult with your CPA before implementing any tax strategy.

4. Roth Conversions Are On Sale

Finally, Roth IRA conversions are on sale in a down market. The one up-side to lower asset prices is that you can convert them from an IRA to a Roth IRA with a lower tax bill. By converting assets in-kind (meaning you don’t sell them before converting), you’re taxed at their fair market value at the date of conversion.

When those investments eventually go back up, you’ve saved taxes on the conversion

If the down market has you feeling nervous, then click here to set up a quick, complimentary introduction call to see if Prana Wealth is a good fit. We do still have the capacity to take on new clients.

As a fee-only financial advisor in Atlanta, we can (and do) work virtually with clients all across the U.S. and we’re here to help you when you’re ready.

Prana Wealth Management LLC (“Prana Wealth”) is a registered investment advisor offering advisory services in the State of Georgia and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by Prana Wealth in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption.
All written content on this site is for information purposes only. Opinions expressed herein are solely those of Prana Wealth, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to other parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant, or legal counsel prior to implementation.
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