Find the silver lining in Wall Street turmoil - Albuquerque Journal

Find the silver lining in Wall Street turmoil

Illustration by Cathryn Cunningham/Journal

The U.S. stock market is having a bad year.

It may turn around before year-end, but the S&P 500 index is currently down 20% (Jan. 1 to June 28), and an index for U.S. bonds (the Bloomberg U.S. Aggregate Bond Index) is down roughly 11%. If you have a diversified, balanced investment portfolio that is approximately 50% equities and 50% bonds, your portfolio has declined roughly 16%. By comparison, cryptocurrencies have declined over 50% year-to-date, and Netflix and Peloton stock are each down over 70%.

The stock market is not for the faint of heart.

Is there a silver lining? First, consider your perspective. If you are a seasoned investor, you know the stock market goes up and down, so the occasional downturn is not a surprise. For investors who can stomach the downturns, the U.S. stock market has been lucrative. Jason Zweig of The Wall Street Journal reported that even with the recent downturn, U.S. stocks have averaged a return of almost 13% per year over the past decade.

The turmoil we are seeing in the U.S. stock and bond markets in 2022 can be attributed to many factors, including high inflation (now over 8%), the war in Ukraine, supply chain disruptions, and the fact that the Federal Reserve has been raising interest rates recently in an attempt to reduce inflation. The Covid-19 pandemic and the stimulus money distributed since early 2020 are also contributing to the current instability of the U.S. economy. Between 2009 and 2021 the federal reserve kept interest rates very low, thereby encouraging growth in the economy. This likely led to strong stock market performance through 2021, but it also led to our current high inflation. Some economists believe a recession will occur in the U.S. during the next 18 months.

What can you do? There are several potential strategies. Some of these strategies are complex, so consult your financial adviser or tax preparer before taking action.

Take advantage of tax loss harvesting

If you have a sizable taxable investment account with investments that have declined in value, you should consider tax loss harvesting. This only pertains to taxable accounts, not to retirement accounts. It entails selling specific tax lots to trigger (or “harvest”) losses, which can then be used to offset capital gains in your investment accounts. Due to the downturn in the stock and bond markets in 2022, there are likely significant losses that can be harvested, and this can lead to a significant savings in taxes. The losses will first be used against capital gains in the current year. If there are losses remaining, $3,000 can be applied to reduce your income. If there are losses not needed this year, you can carry them forward to future years and use them when needed.

There are many IRS tax-code rules that must be followed, such as the “wash-sale” rule that states you cannot claim the loss if you buy the same investment back in less than 31 days. Also, it is best if you have access to the specific tax lots within each investment so you can manage the short-term and long-term losses. These rules are beyond the scope of this article, but there are numerous articles online, specifically from TurboTax, Schwab and CNBC. If you work with a financial adviser or stock broker, they should be providing tax loss harvesting services to you. If they are not, call them and discuss the strategy.

Do a Roth conversion

As I have written many times, Roth IRAs are far superior to traditional IRAs based on current tax laws. To build a Roth IRA an investor can contribute to the account (with income limitations) or convert a traditional IRA to a Roth IRA.

Some consider a downward trend in the stock market to be a good time for a Roth conversion. An example explains this best. Assume you have a traditional IRA that was worth $200,000 in early January. You plan to convert $50,000 this year (25% of the total), and the remainder over the next three years. Assume the account has declined by 20% since January, and it now totals $160,000. If you follow through with your plan and convert $50,000, you will be converting 31% to the Roth ($50,000 · $160,000) rather than the original 25%. The $50,000 conversion will cost you the same amount in taxes, but you are moving a higher percentage to the Roth. For an explanation of this strategy, search online for “ Roth Conversion on Sale.”

Seek higher interest rates

The federal reserve is raising interest rates. Higher rates are not good if you are planning to buy a house and need a new mortgage, or if you carry a balance on a credit card from month to month. (If you have a fixed rate mortgage or car loan, you will not be impacted. The higher interest rates will impact new loans and variable rate loans, such as credit cards.) However, higher interest rates are a good thing if you purchase new CDs, treasury bills, or bonds with the higher rates. Banks are starting to raise their interest rates on savings accounts, which benefits their customers.

Consider U.S. Treasury Series I Savings Bonds (I Bonds), which are currently paying a hefty 9.6% interest. The rate adjusts every November and April. Unfortunately, I Bonds can only be purchased through the U.S. government’s website at, and there is a limit of $10,000 per person per year. You cannot cash out the bond for at least 12 months, and if you cash it before five years, you will lose 3 months of interest. The I Bonds will pay interest for 30 years, but the interest fluctuates with inflation every 6 months. I Bonds are issued by the U.S. government and are considered very safe. For more information, search online or go to the Treasury Direct website.

The downturn won’t last forever

Recognize that the stock market has been lucrative for investors over the long term. Downturns are to be expected, and they do not last forever. The 34% decline in the S&P 500 that occurred in February 2020 (at the beginning of the pandemic) only lasted 33 days, and it took investors roughly five months to recoup the loss.

A prior major downturn began in October 2007 and continued until March 2009. Labeled the “Great Recession,” the S&P 500 declined 57%, and it took four years for investors to recoup their losses. A loss of 57% would be painful, indeed. However, because bonds performed well during that time, a balanced portfolio with 50% equities and 50% bonds declined roughly 25% rather than 57%. This shows the benefit of a balanced portfolio.

You will see articles recommending you “buy the dip,” which means you purchase more equities while the price is low. This strategy works well, but it is difficult to predict where the bottom is, and whether the stock market is ready to start recovering. If your investment horizon is long, consider buying equities after a downturn. Rebalancing your portfolio will also lead you to buy equities after a downturn.

Beyond the dollars

When the stock market declines, one of the best strategies is to hang tight and turn your attention to more important issues. This may include devoting more time to your family and friends, having fun, getting into nature as often as possible, reading, exercising, volunteering, or gardening.

Or, simply recognize this is July 4th and focus on the freedom we have in America. Enjoy some festivities to celebrate, and express gratitude for our many blessings. In New Mexico, dancing in the rain is also encouraged.

Donna Skeels Cygan, CFP, MBA, is the author of “The Joy of Financial Security.” She was a fee-only financial planner in Albuquerque for more than 20 years before retiring in 2021. She welcomes emails from readers at

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