3 Ways to Take Advantage of the Stock Market Slump

3 Ways to Take Advantage of the Stock Market Slump
  • It’s painful to watch your portfolio drop, but there are strategic moves you can make during a bear market.
  • Do a Roth conversion now if you’ve been considering it — you’ll end up paying less in taxes.
  • It’s also a good time to increase your contributions and look for tax-loss harvesting opportunities.

It’s an understatement to say the stock market has been stuck in a rut lately. And while it can be quite jarring to watch your investment returns fall further and further from last year’s record highs, a

bear market

doesn’t have to be all bad. In fact, for savvy investors, steep market declines often provide a chance to be opportunistic and take advantage of high-quality stocks. 

There is nothing wrong with the conventional wisdom to hold tight and ride out bad market cycles. But for those who have a higher-than-average risk tolerance, as well as the capacity to take on additional financial risk, a bear market presents a great opportunity to be strategic and capitalize on what is happening.

Below are three ways to take advantage of a bear market and position yourself for an eventual recovery.

1. Execute a Roth conversion

If you have been eyeing this strategy for some time and you hold investments in a traditional IRA, now might be a good time to consider a Roth conversion. That is because a bear market means that your account value is likely lower, and executing a Roth conversion at that lower amount means you will pay less in taxes than if you wait until the market recovers.

In addition, an eventual market recovery would help you to recoup what you end up paying in income taxes due to that conversion. And if you think the market will someday rally back to its highs and continue to power higher over time, executing a conversion while in a down market essentially allows you to choose to have that rally happen inside of your tax-free bucket rather than in your tax-deferred one. 

When contemplating a Roth conversion, it is always important to consider whether the increased income will push you into the next

tax bracket

for the year and whether you will be able to wait out the five-year rule before you need access to Roth funds. However, for those who have both a long time horizon and the capacity to withstand any future market shocks, the current bear market cycle may be presenting a great opportunity to create a tax-free pool of assets for your future self in your later years.

2. Take advantage of tax-loss harvesting

Investing in a rental property or a small business can provide you with solid cash flow, covering your expenses and netting you a profit at the end of each year. But when such assets are sold at a profit, they often produce significant long-term

capital gains tax

obligations for their owners.

If you have substantial gains, perhaps from the sale of a rental property or a business, selling off some of your most beaten-down stocks that you don’t expect to recover any time soon is another way to take advantage of the current bear market. Selling off those losers at a time when you have meaningful

capital gains

elsewhere in your portfolio is what’s known as tax-loss harvesting. 

Even in bull markets, not every investment will be a winner. Thankfully, a losing investment often provides you with a tax benefit. Tax-loss harvesting allows you to get those losers out of your portfolio and put them to good use, ultimately reducing your tax liability for the year.

3. Increase your contributions

If you find yourself flush with cash and looking for a good use for those funds, another way to take advantage of a bear market is to simply increase your contributions to your investment accounts. Whether by increasing your contribution percentage to your workplace retirement account or by contributing those funds to your brokerage account, adding a few more dollars while the market is down will help you buy more shares at lower prices. 

There is a reason why CEOs and other top executives of publicly traded companies tend to scoop up large chunks of their company’s shares during market downturns when they believe they are significantly undervalued. That is essentially what you would be doing by buying more of what you consider to be a high-quality long-term investment during a bear market. 

This is simple dollar-cost averaging and can help you build up a position in your preferred investment over time, while simultaneously lowering your average purchase price.

Of course, no one knows exactly when the bear market will end and a subsequent market rally will begin. But, by being strategic and taking advantage of the opportunity presented by this current market cycle, you can position yourself to come out ahead once the market does eventually turn around.