Down Market Investing Strategies to Take Advantage of an Economic Downturn

It can be scary to continue investing during an economic downturn, but a market decline can offer opportunities for the savvy investor. 

What to Do With Your Money Amid Recession Concerns

Progress toward your dreams for the future doesn’t have to stop during a volatile market or an economic downturn. Here are some down-market investing strategies that you can utilize to keep you moving forward. 

1. Apply Dollar-Cost Averaging

If you contribute a portion of each paycheck to a retirement account, congratulations – you’re already dollar-cost averaging! Regardless of what the market is doing, you are investing a set amount of money at regular intervals. Sometimes share prices are high and your money doesn’t purchase as much, while other times you are getting more because you’re buying low. 

Dollar-cost averaging is a beneficial strategy over time because you may pay a lower average price per share in your portfolio.

Using a dollar-cost average strategy during times of market volatility or a down market can be especially fruitful because you’re taking advantage of a time when stock prices may be low. Plus making investing a regular part of your routine – such as by automating the contributions to your retirement or investment account – ensures that you are making your future a priority. 

1. Diversify Asset Classes

You should always ensure that you have diversified asset classes in your portfolio, but that becomes even more critical when entire sections of the financial system may be experiencing hardships. In other words, make sure that the kinds of things you invest in perform differently. For example, your investment accounts shouldn’t be entirely comprised of stocks but should include other types of investments – such as bonds, cash equivalents, real estate commodities or currencies – based on your risk tolerance and investment time horizon. Oftentimes stocks and bonds are used as counterexamples: stocks may have higher returns but more risk during market volatility, while bonds are, on average, more stable but provide less opportunity for growth.

Even among the same asset classes, adding diversification can help protect your investments. For example, investing in stocks from different industries helps protect you because different industries don’t always react to pressures in the same way; if some of your investments are negatively impacted, others may not be. 

Rebalancing your portfolio regularly so it continues to be diversified can help you protect your investments – and your future – from the risks of a downturn.

1. Convert a Traditional IRA to a Roth IRA

If you’ve been thinking about converting a Traditional IRA to a Roth IRA – which you might do if you already have a substantial amount of money in a Traditional IRA, believe your tax liability will be higher in retirement or do not want to take required minimum distributions (RMDs) – the best time to do so is during a downturn when your account value has dipped.

With a Traditional IRA, you pay taxes on the money when you withdraw it (presumably in retirement). With a Roth IRA, you pay taxes before you invest that money. When you convert from a Traditional IRA to a Roth IRA, you have to pay taxes on the converted funds in the year of the conversion. Converting when your account has less value due to an economic downturn may mean you’ll pay less in taxes.  

1. Reevaluate Portfolio Allocation by Sector

If you’re concerned about the market downturn because you know you will have to access some of your investments in the near future – such as purchasing a home– you may want to consider shifting your investments into more stable sectors. For example, investing in healthcare or consumer staples is typically a safer choice during a downturn. Unlike a new car, luxury goods or updated technology, items like medication, groceries and energy are necessities.

1. Consider Tax-Loss Harvesting

When you sell assets from taxable accounts (which do not include 401(k)s or IRAs) for a loss, you can “harvest” that loss, up to a limit of $3,000 a year, to help offset any capital gains you’ve realized. Taking capital losses may help reduce your taxable income and therefore the amount of taxes you’re required to pay.

Ask An Advisor

Working with a Farm Bureau financial advisor means working with a professional who can help you understand your options and make decisions that advance your dreams for the future.