4 Strategies to Make the Most of a Stock Market Downturn

With the S&P 500 down over 10% in 2022, many investors have resorted to panic, which is completely understandable for a variety of reasons. The good news is that there are still opportunities — even when the market is down — to maximize your net worth in the long run.

If you have the inclination, it can actually make a lot of sense to optimize your portfolio when the market is down. Luckily, there are some worthwhile strategies for both the investment and tax pieces of your portfolio, so you’ll have a chance to improve your financial situation on multiple dimensions.

Here are four strategies for making the most of this stock market downturn.

1. Buy more

Some investors choose to ignore the market entirely, and leave their regular 401(k) and IRA auto-deposits alone — despite falling valuations. This is a great strategy: By continuously adding to your nest egg at lower prices, you can accumulate more shares than you would if the market were higher. When the market recovers, you’ll be far better off than if you had stopped investing.

Additionally, if you have the funds available, deploying it during a downturn makes a lot of sense; many investors wait for these moments to put excess cash to work. Even though it may feel counterintuitive, buying when stocks are flashing red is likely to make you far richer in the long run.

2. Don’t look too often

Looking at a falling portfolio is unsettling, whether you’re just getting started or (perhaps especially) if you’re already a millionaire. Watching your portfolio fall can have the effect of making you feel discouraged, which in turn can stop you in your tracks when it comes to buying more.

This ties to the broader thought of controlling what you can control. Global stock valuations will rise and fall with or without anyone’s permission, but only you have control over your day-to-day behavior. Constantly refreshing your portfolio is likely to do more harm then good when it comes to your trading actions, so be sure to focus on the long run and moderate your emotions to the extent that you can.

Image source: Getty Images.

3. Continue to clear out debt

If you carry debt other than a primary mortgage, using excess cash to further pay down debt during a downturn can give you a feeling of accomplishment. This of course does assume you have the extra income to pay down debt, but the feeling of making headway even when the market is falling is an enviable one.

The issue with carrying too much debt is that interest will be charged whether the market rises or falls, so continuously prioritizing debt payoff will do wonders for your long-run net worth — not to mention your credit score. On the flip side, ignoring debt — particularly when the market falls — can have an outsized negative effect.

4. Tax-optimize where possible

Even though a falling market won’t help your portfolio value in the immediate term, you can lock in lower tax liabilities in certain investment scenarios.

Say you have a concentrated stock position that you’ve been meaning to exit, but a large unrealized gain (and consequently, a large looming capital gains tax bill) prevented you from selling. A market downturn presents the opportunity to sell all or a portion of your stock position, and rebalance the proceeds into market index funds.

You’ll still pay tax if you sold at a gain, but you’ll pay less on a relative basis than if you were to sell when stocks were near their all-time highs. Plus, you’ll put your portfolio on a better long-term track by diversifying out of large single-stock positions.

Act, but do so strategically

A quickly dropping market can produce very negative emotions, but the worst outcome is for those negative emotions to lead to imprudent actions. Market downturns are ripe for these errors, so it’s a good idea to know what you can do that will make a positive difference in the long run.

By focusing on what you can control — not what you can’t — you’ll set yourself up for better outcomes in the future. Keep buying, don’t look at your portfolio too much, reliably pay down debt, and tax optimize when and where you can.

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