The S&P 500 is in a bear market, having lost 20% so far this year. So what’s an investor to do? Christine Benz, Morningstar’s director of personal finance offered answers in five areas.
Savings Rate/Drawdowns
“If we're still working and contributing to our retirement plan accounts, the biggest determinant of our plan's success or failure will be our own savings rate,” Benz said. “So, take a moment to review how much you're putting in. See if you can't bump up your contribution a little bit, because … these down markets are your friend.”
Meanwhile, “when it comes to retirement, if you're actively in drawdown mode, you want to look at that withdrawal rate, revisit it, make sure that it's reasonable.”
Rebalancing Your Portfolio
“As the market goes down, … typically stocks decline in value as a percentage of your portfolio,” Benz said. “And the issue is that they can depart from whatever target you had.
“So, maybe your plan was to have a 70% or 75% stake in stocks on an ongoing basis. Well, you may find that you've drifted down significantly from that, given the losses in the equity market.”
Buying in a Bear Market
“The good news is, if you're doing a basic rebalancing strategy like I just talked about, you're already doing some bargain-hunting,” Benz said.
“You're buying things that have gone down. Presumably, their valuations are cheaper. So, you don't need to get a lot more complicated in terms of bargain-hunting than that.”
But if you do want to get more complicated, you can look at sub-asset allocations like growth stocks, Benz said.
Tax-Loss Selling
“Tax-loss selling involves your taxable account…. You're looking for holdings that are trading below what you paid for them,” Benz said.
“This can be an advantageous strategy. If you find tax losses in your portfolio—you sell a holding that is trading below what you paid for it--you can capture a tax loss. That tax loss can be used to offset capital gains elsewhere in your portfolio.”
Roth IRA Conversions
“Roth assets have a lot of advantages,” Benz said. “The two biggies are that you are able to take tax-free withdrawals in retirement, and then, for Roth IRAs, required minimum distributions don't apply.”
Further, “the reason why it's advantageous to do a conversion when the market is down is that it depresses your balance and that depresses the taxes that you will owe when you do the conversion,” Benz said.
“The hitch with conversions, as attractive as they seem, is that you will owe taxes on any appreciation in your account or any funds that you've put in on a pretax basis.”
