Find the silver lining in the turmoil of Wall Street

Illustration by Cathryn Cunningham/Journal

The US stock market is having a bad year.

It could turn around before the end of the year, but the S&P 500 index is currently down 20% (January 1 to June 28) and an index for US bonds (the Bloomberg US Aggregate Bond Index) is down. down about 11%. If you have a diversified and balanced investment portfolio of about 50% stocks and 50% bonds, your portfolio has shrunk by about 16%. By comparison, cryptocurrencies are down more than 50% year-to-date, and shares of Netflix and Peloton are each down more than 70%.

The scholarship is not for the faint of heart.

Is there a silver lining? First, consider your point of view. If you’re a seasoned investor, you know the stock market goes up and down, so the occasional dip is no surprise. For investors who can handle the downturns, the US stock market has been lucrative. Jason Zweig of The Wall Street Journal reported that even with the recent downturn, US stocks have averaged returns of almost 13% per year over the past decade.

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

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

Take advantage of tax loss harvesting

If you have a large taxable investment account with investments that have gone down in value, you should consider collecting tax losses. This only applies to taxable accounts, not retirement accounts. This involves selling specific tax lots to trigger (or “reap”) losses, which can then be used to offset capital gains from your investment accounts. Due to the slowdown in stock and bond markets in 2022, it is likely that significant losses could be reaped, which can result in significant tax savings. Losses will first be applied against capital gains for the current year. If any losses remain, $3,000 can be applied to reduce your income. If there are unnecessary losses this year, you can carry them forward to future years and use them as needed.

There are many IRS tax code rules that must be followed, such as the “wash sale” rule which states that you cannot claim the loss if you redeem the same investment in less than 31 days. Additionally, it is best that you have access to the specific tax lots of each investment so that you can manage short and long term losses. These rules are beyond the scope of this article, but there are plenty of articles online, especially from TurboTax, Schwab, and CNBC. If you work with a financial advisor or stockbroker, they should provide you with tax loss collection services. If not, call them and discuss the strategy.

Do a Roth Conversion

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

Some consider a downtrend in the stock market to be a good time for a Roth conversion. An example explains this best. Say 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 rest over the next three years. Let’s say the account is down 20% since January and now totals $160,000. If you follow your plan and convert $50,000, you will convert 31% to Roth ($50,000 · $160,000) rather than the original 25%. Converting $50,000 will cost you the same amount in taxes, but you’re moving a higher percentage to the Roth. For an explanation of this strategy, search online Roth conversion for sale.

Look for higher interest rates

The Federal Reserve raises interest rates. Higher rates aren’t good if you’re thinking of buying a home and need a new mortgage, or if you’re carrying over a balance on a credit card from month to month. (If you have a fixed rate mortgage or car loan, you won’t be affected. 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 buy new CDs, treasury bills or bonds with the highest rates. Banks are starting to raise their interest rates on savings accounts, which benefits their customers.

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

The downturn won’t last forever

Acknowledge that the stock market has been lucrative for long-term investors. Slowdowns are to be expected, and they don’t last forever. The 34% drop in the S&P 500 that occurred in February 2020 (at the start of the pandemic) lasted only 33 days, and it took investors about five months to recoup the loss.

An earlier major downturn began in October 2007 and continued through March 2009. Dubbed the “Great Recession,” the S&P 500 fell 57% and it took investors four years to recoup their losses. A loss of 57% would be painful, indeed. However, since bonds have done well during this period, a balanced portfolio of 50% stocks and 50% bonds has fallen by around 25% rather than 57%. This shows the advantage of a balanced portfolio.

You will see articles advising you to “buy the dip”, which means you buy more shares while the price is low. This strategy works well, but it is difficult to predict where the bottom is and if the stock market is ready to start to rally. If your investment horizon is long, consider buying stocks after a downturn. Rebalancing your portfolio will also cause you to buy stocks after a decline.

Beyond the Dollars

When the stock market drops, one of the best strategies is to hang in there and focus on bigger issues. This may include spending more time with family and friends, having fun, getting out into nature as often as possible, reading, exercising, volunteering, or gardening.

Or, just acknowledge it’s the 4th of July and focus on the freedom we have in America. Take advantage of some festivities to celebrate and express your 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 paid financial planner in Albuquerque for more than 20 years before retiring in 2021. She welcomes readers’ emails at

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