3 Ways to Take Control in a Volatile Stock Market

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. Stocks have gotten off to a rough start so far in 2022, and high-quality bonds have struggled as well. Joining me today to discuss some practical steps that investors can take to improve their portfolios and plans during volatile times is Christine Benz. Christine is Morningstar's director of personal finance and retirement planning.

Hi, Christine. Nice to see you today.

Christine Benz: Hi, Susan. Good to see you.

Dziubinski: Christine, let's start out by talking about what investors should avoid doing in a market like this.

Benz: One of the key ones would be to resist the urge to peek too frequently at your portfolio. I think that sometimes investors can get in there and make changes that they might otherwise not be inclined to make. So, don't look too often. Also, resist big either/or moves where you're either in stocks or out of stocks. Those sorts of maneuvers rarely pay off. And I think the other thing is don't try to catch the bottom. Don't assume that even if the market falls a lot that that's the absolute down point. There may be more down markets ahead. Don't try to plow a bunch of cash into the market assuming that you've got the bottom. You may never catch the bottom, and I would say don't sweat that.

Dziubinski: Christine, you've brought a short list of activities that can actually be productive when markets are down a bit, and one of them is tax-loss selling. How realistic is it that investors today could engage in tax-loss selling because of the tremendous bull market that we've seen in general over the past decade or so?

Benz: That's a really good question, Susan. And from a practical standpoint, if you're a mutual fund investor, if you're someone who holds broadly diversified funds, you're probably not going to find a lot of tax-loss selling opportunities in this market. On the other hand, some investors may be able to. So, individual stock investors, especially those who have purchased positions recently may be able to do some tax-loss harvesting. If you have more narrowly focused funds in your portfolio, and you've made recent purchases there, perhaps you may be able to find some tax-loss candidates. And then, I would also call out people who are using the specific share identification method of tracking their cost basis, they may be able to cherry-pick some recently purchased positions. Some people, I think, indeed may be able to find some opportunities, some may not.

Dziubinski: And again, investors can even rebuy something similar if they want to maintain that exposure, right?

Benz: That's right. If you are interested in tax-loss selling, I urge people to get familiar with the wash sale rule, which basically means that you can't turn around and buy the same, or even what the IRS calls, a substantially identical security in its place within 30 days of having sold it. Keep that in mind. What I would say though is that investors do have a fair amount of leeway in this space in that you could, say, sell an actively managed large-cap growth fund and buy an index-tracking large-cap growth fund and you would not want to follow the wash sale rule. So, you do have some wiggle room.

Dziubinski: And what about tax-loss selling in an IRA? Is that even possible?

Benz: Well, it used to be, Susan. It used to be not advisable because it essentially meant that you'd need to liquidate all of your IRAs. But now, it's not even possible because the miscellaneous itemized deduction category went away as of the 2018 Tax Cuts and Jobs Act. So, it's not even an option. Take it off the table even if you've had some losses in your IRA recently.

Dziubinski: Speaking of IRAs, you do note that converting traditional IRA assets to Roth IRA assets during a market like this could be a good idea for some investors.

Benz: Right. That's absolutely true, Susan. All else being equal, you want to do conversions in down markets if you possibly can, because the taxes that will be due on the conversions will be dependent on the value of the securities in your IRA that haven't yet been taxed. So, you want to try to look for these opportunities where things are down a little bit. Certainly, get some tax advice. For a lot of people though, doing a series of conversions over a period of years is going to be a better idea than making conversions all in a single year. But this is a spot to get some tax advice. Just check to see whether conversions are even advisable for you given the particulars of your situation.

Dziubinski: And then, finally, Christine, you say that making contributions in a market like this is a good idea.

Benz: It is. So, if you haven't yet funded an IRA for 2021, you have until April 18 of this year to make that contribution. If you haven't made your 2022 contribution, you can go ahead and make it as well. And the idea is that if you are putting money to work, why not put it to work when stocks are down, when securities are down a little bit, as they have been so far this year.

Dziubinski: Well, Christine, thank you for your time today and for these great ideas to help us as investors have a little bit of more control over our portfolios during these somewhat tricky market times. We appreciate it.

Benz: Thank you so much, Susan.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thanks for tuning in.