5 Ways Investors Can Take Advantage of a Down Market

Expansions and contractions are natural aspects of financial markets. However, because the markets tend to go up more than they go down, reverses can seem more severe than they actually are. Still, there are opportunities to be had, whether the market is going up or down. Alternative investments for example, such as REITs and other opportunities offered by Yieldstreet, tend to be less connected to public equity and have the potential to prosper when traditional assets are retreating. 

Along those lines, here are five ways investors can take advantage of a down market.

Harvest Tax-Losses

Selling into a loss might be seen as counter-intuitive. However, for investors with capital gains or income in need of offsetting, selling a losing position can offer tax benefits. Losses accrued from implementing this approach can potentially reduce capital gains to zero. Additionally, losses exceeding gains can negate up to $3,000 in ordinary income annually. This strategy also offers an opportunity to offload underperforming investments and diversify a portfolio. 

Restructure Portfolios 

Market downturns also present an occasion to jettison taxable securities at a lower tax cost. Another plus, assets purchased to replace them can be had at artificially depressed prices. 

Deploy Excessive Cash

Warren Buffett is quoted as having said, "The time to be fearful is when others are greedy, and the time to be greedy is when others are fearful." A down market presents an opportunity to put an excessive cash position to work. Because many people sell when the market is in decline, deploying excess cash— depending upon an investor's time horizon and short-term needs — can be like shopping a clearance sale. 

Exercise Incentive Stock Options (ISOs)

A down market also presents an opportunity to exercise stock options while staying under the Alternative Minimum Tax exemption ($75,900 for single filers or $118,100 for married filing jointly in 2022).

Implement a Roth Conversion

Converting a traditional IRA, or a 401(k) investment account to a Roth account during a downturn will lower the tax liability of doing so. While pre-tax contributions are taxed when a Roth conversion is implemented, the value of an IRA or 401(k) account is likely to be lower when the market is in retreat. This presents an opportunity to convert those assets at a lower cost, enjoy resumed growth as the markets recover, and enjoy tax-free passive income withdrawals on those gains. 

With all of that said, sometimes the best thing an investor can do to take advantage of a down market is stand pat. The financial markets are one of the few endeavors in which buyers tend to purchase when prices are going up and sell when they're going down. Panic has caused many investors to incur unnecessary losses. The prudent investor always keeps their goals and time horizons in mind. While the tactics above do have the potential to deliver gains, they should be employed only after careful consideration. 

Source: Yieldstreet