Investing into a bear market can feel like a questionable move. But history has shown us that down markets are temporary and often represent more of a buying opportunity than an exit signal.
Let's take a look at three Hail Mary plays that can help bring your portfolio back to life.
1. Accelerate 401(k) contributions
This isn't a recommendation to max out your 401(k) this year; instead, it's a suggestion to contribute as much as you can to your 401(k) right now. Of course, this assumes you can afford to do this or you have some easily accessible cash to cover short-term expenses.
If you were to bump up your 401(k) contributions to 25% or 30%, you'd receive more bang for your buck since the market is down nearly 20% from its winter highs. In other words, big contributions to tax-deferred plans allow you to buy more shares at lower prices, which leads to bigger account balances in the long run.
You'd likely need to contact your company's 401(k) plan administrator to effect the change. If you decide to do it, you'll also have a chance to max your 401(k) contributions earlier in the year, which means more dispensable cash later in the year.
2. Front-load Roth conversions
Recall that Roth conversions involve moving pre-tax retirement money (typically held in IRAs and 401(k)s) into Roth IRAs. When you do this, you're effectively declaring the pre-tax money as income in the current year, and you'll owe income tax on any amounts converted.
The best time to perform a Roth conversion is at the intersection of a relatively low-income year and a down market. This is because you'll pay less tax on any money converted than you would have when the market (or your income) was higher.
Since we're currently hovering around bear market territory, converting at least some assets to Roth IRAs may make sense for you. Once the money is converted, you'll never have to worry about tax on growth or earnings again, and you'll set yourself up with a nice chunk of tax-free money for retirement.
In the short run, it can feel uncomfortable to make portfolio changes. But in the long run, Roth conversions make a lot of sense -- especially if you can afford to foot the tax bill up front.
3. Look for beaten-down stocks
If your portfolio is in very rough shape, rebalancing into stocks and sectors that have fallen the most relative to their intrinsic values makes a lot of sense.
A popular tech-based ETF, the Invesco NASDAQ-100 Trust is down over 25% this year after being a stellar performer much of the last decade. Here, you'll get exposure to most of the top technology companies at a steep relative discount.
While this is by no means the only option in the way of finding value, it's this type of thinking that can pay off greatly in the long run -- even if it may seem counterintuitive.
Don't act on emotion
There isn't really a need to make aggressive portfolio moves when the market falls, but there are some tactical changes you can make that are likely to look smart in the long run. Accelerating retirement plan contributions, going after Roth conversions, and looking for value in the market are only a few of the actions you might consider.
If you decide to leave your portfolio as-is, and simply continue making contributions to your current asset allocation, there's also nothing wrong with that. But if you do end up making changes, be sure you've given them some deliberate thought first.