Five Ways to Take Advantage of a Down Market

With the news reporting accelerating interest rates, inflation, and the potential for recession, preparing to deal with what could become a widespread market downturn is a good idea. Toward that end, the investment experts at Yieldstreet have compiled this list of five ways to take advantage of a down market. 

Harvest Tax Losses

Selling at a loss might seem like an illogical investment strategy, but there are times when doing so can be advantageous. When an investment achieves a significant gain, selling a losing one could reduce capital gains tax liability. Furthermore, in a tax year in which more losses than gains are realized, up to $3,000 of ordinary income can be offset. A strategic application of this approach can help investors rid portfolios of underperforming positions, as well as diversify holdings.  

Execute a Roth Conversion

Shifting dollars from a tax-deferred IRA into a post-tax Roth IRA when a down market depresses the value of a portfolio could result in a lower withdrawal tax liability. When the market begins to recover, those shifted assets could possibly recoup their losses and achieve more tax-free advances.  In some cases, this could completely offset the tax burden imposed by the conversion. 

Buy Dividend-Paying Stocks

Warren Buffett once said, "It is wise for investors to be fearful when others are greedy, and greedy when others are fearful." Stock prices tend to go down when people sell en masse. This can be a good time to bolster a portfolio with stocks that pay dividends—at reduced prices. Companies with an uninterrupted dividend history can be bargains when a bear market depresses their values artificially. This approach holds the potential to deliver higher yields over the long term. Dividend-paying stocks can also be a useful tool for buffering volatility. 

Invest in Real Estate

Rental properties offer the possibility of generating consistent income regardless of the performance of the stock market. This gives real estate the potential to serve as a useful hedge against market volatility. Even better, one can invest in real estate without purchasing physical properties by taking a position in a real estate investment trust. This stratagem offers a lower cost of entry, freedom from property management responsibilities and potentially higher than average dividends. Real estate investments can be a useful tool for mitigating volatility when stock prices are trending downward. 

Stand Pat

Since 1928, there have been 24 downturns that were officially classified as bear markets. While past performance does not forecast future potential, the fact of the matter is that the market has always come back from them. Selling during a downturn to preserve capital - then trying to recover those positions when the market turns around - is far riskier than waiting it out. Time "in" the market tends to deliver better returns than "timing" the market. This can make standing pat a reasonable position to take during a retreating market. 

Source: Yieldstreet