That’s right, the market has been downright sour this year with the S&P 500 declining over 20% and the Dow Jones dropping over 15%. Technology stocks had been leading the way the past several years, however the Nasdaq is down almost 29% in 2022, ouch! What about bonds though? Bonds are supposed to hold up well in down markets, right? That’s not always the case. Short term bond funds like the Vanguard Short term Bond fund (symbol BSV) are down almost 5% this year, and long-term bond funds like Vanguard Long Term Corporate Bond fund are down over 21%. It’s safe to say, if you own any kind of a diversified portfolio you aren’t thrilled to open your monthly account statement when it comes in the mail.

So the market has given us a grove of lemons, now what? It’s time to make lemonade! I’ll spell out the recipe in a moment, but before we get into that, it’s important to understand a few key points about market corrections and bear markets.

Point #1 – Market corrections happen about every year on average. An official “market correction” is when the market declines by 10% or more. The average market correction is about 13.4% and lasts an average of 54 days.

Point #2– Bear markets happen every 3-5 years. An official “bear market” is when the market declines by 20% or more. The average bear market lasts about a year. If you are in your 50’s you can expect to live through thirty or more market corrections and seven or more bear markets. Now for the good news….

Point #3– Every bear market has eventually led to a bull market 100% of the time. It’s important to expect times of turbulence in the market, but it’s just as important to understand that corrections and bear markets have historically always recovered fully and eventually led to new market highs. Don’t let the down markets get you down, rather take advantage of the opportunity. Source: Mallouk, Peter. The 5 Mistakes Every Investor Makes And How To Avoid Them. Wiley, 2014.

There are several ingredients we can use to make bear market lemonade. Let’s talk about the obvious first, idle cash. While you should keep three to six months of living expenses in your savings as well as cash for planned purchases (house down payment, car purchase, home updates, etc) you should look for these opportunities to put your idle cash to work. Yes, the bank would be happy to hold your cash for you while they pay you next to zero percent interest and inflation slowly erodes your purchasing power, but why not look to invest, let’s say, in your Roth IRA when the market is on sale? A Roth IRA allows you to grow your money completely tax-free. Depending on your age and income you can invest up to $7,000 per year in a Roth. The Roth is the only type of investment account where you can make an infinite amount of money and pay no federal or state tax on the gains, there is nothing quite like it, it’s the gold standard investment account type and you should be looking to maximize your Roth contributions yearly. Since your ability to contribute to a Roth is highly dependent on your specific situation, you’ll want to be sure and speak to your tax professional and financial advisor when contributing to one.

When the market is hurting, get your IRA converting. Many investors have Traditional IRAs and 401Ks, they grow tax-deferred, but they are NOT tax-free, you (or your heirs) will eventually pay taxes on 100% of the principal and the gains. Wouldn’t it be nice to move your Traditional IRA/401K money into your Roth IRA so it would grow tax-free? You’re in luck, you can do a Roth Conversion, this is when you pay taxes now on your Traditional IRA/401K and move those funds into your Roth IRA where they can grow tax-free. Now that we are in bear market territory, converting investments from your Traditional IRA to your Roth may make a lot of sense. Make sure you visit with your tax professional and financial advisor when making a Roth Conversion.

Harvest those losses! If you have money that is not part of an IRA, perhaps a standard Joint or Individual investment account and it has securities that are at a loss, you may be able to sell those securities to generate a tax write-off. While this can be a great move if done correctly, let me say one last time – don’t do this without the help of a tax professional and financial advisor, you’ll want to have experts working with you to ensure it’s appropriate for you and executed properly.

To Sum it all up there are five things you can do to make something great out of a bear market.
1. Don’t panic, remember bear markets happen and have historically always recovered.
2. Invest idle cash when the market is on sale, don’t let inflation erode your purchasing power.
3. Fully fund your Roth IRA, it’s the gold standard and gives you unlimited tax-free growth.
4. Convert Traditional IRAs/401ks to your Roth IRA, this can potentially save you thousands in taxes during your golden years.
5. Tax Loss Harvest your non-IRA accounts, this can be a powerful strategy to save on taxes if done correctly.

I hope you have found this information helpful; I’d love to discuss any questions you have and welcome your call. Please call me (Bret) directly at 623-256-7167, or you can also visit our website at www.greenpeaksplanning.com.