With the major financial markets around the world dropping into bear market territory (20% + decline from the most recent high), a lot of clients are wondering how to capitalize on the lower stock prices that have been presented to us. Aside from sitting on piles of cash in your bank account to gradually buy quality companies that are on sale, there are a few other strategies that can be implemented to benefit from the market downturn on a long-term basis.
1. Evaluate how much cash you have on hand and make sure you have enough to cover your basic household costs for 9-12 months. Consider taking the excess cash and gradually buying shares of a low-cost U.S. Index fund or high-quality stocks, such as Apple, Google, JP Morgan, Mastercard, Microsoft and Amazon.
2. 401k adjustments – if you are allocating some of your future contributions to bond or lower risk funds, re-direct those contributions to stock or higher risk funds. This will enable you to increase the number of units you are buying, and when the market recovers, you’ll own more units which will better participate in a recovery. Bonds are necessary in advance of a fall, and less important after the fall has already occurred.
3. ROTH IRA conversions – consider converting some of your IRA assets to a ROTH IRA while your accounts are down. By converting low, you’ll capture the rebound and growth in a tax-free account. This will accelerate the value of your ROTH IRA compared to converting when the market is at a higher level.
4. File and pay your 2019 taxes on July 15th instead of April 15th. The IRS is allowing us all to delay filing returns and paying taxes. Do not sell risk assets at the current depressed levels to fund your tax liability. Instead, give your assets more time to hopefully recover. Furthermore, give yourself the opportunity to add to your IRA accounts by July 15th, effectively giving you 3 more months of retirement contribution opportunity for 2019.
5. Consider creating additional capital to invest in beaten up areas of the market by reducing your bond exposure and re-allocating those proceeds to stock funds. Bonds have gone up and stocks have gone down, so you will be selling high (bonds) and buying low (stocks). Re-balancing can be very effective during times like these and will further improve your rate of recovery.
6. While I’m not a proponent of taking on new debt, if you have some 0% intro rates from your credit cards for 12-18 months, consider this interest free loan as an additional source of capital to invest in risk assets. History suggests a high probability of stock being higher 12-18 months after a 30% decline. There is risk in doing this, as you still need to pay the loan back, only keeping any gain you realize in utilizing someone else’s cash to invest in a depressed market.
Each of these ideas can help you capitalize on the current opportunity with which we are presented. Not all of these ideas are appropriate for everyone, and each idea does carry some degree of risk. Compared to what you owned just last year, what you ultimately buy today will likely be the best performing assets over the next 10 years. It makes sense to do what you can now to whatever extent you can.
Call me at 216.570.5060, or shoot me an email to discuss these ideas. We can explore beneficial opportunities from the current market drawdown.
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