Profiting from Market Downturns

Market downturns are not fun. Nobody wants to
see their overall portfolio value decrease. However, they are an inevitable
part of every investor’s life and properly handled can increase one’s wealth. What
is important to remember is that even though stock prices may fall, the value
of the companies they represent remains the same. This means that new
investments are cheaper and for the same money you can buy more shares. When
the market eventually turns up, one’s wealth has grown. Everyone who has been
in the market knows that it’s impossible to predict when a market will turn. Global
Asset Management Advisors understand that market downturns, especially sharp
ones, can be emotional times. Successful investors disregard their fears and
seize the moment.

Carpe Diem!

Maintain your discipline and seize
opportunity. Investing during market downturns means you are buying the same
stocks at lower prices. It’s human nature for investor to try to the market.
Certainly, it feels much better seeing capital gains than losses. But even for
the pros this is virtually impossible. On the contrary, individual investors
are inclined to chase the market by buying into peaks and selling at the
bottom. History has demonstrated this over and over and over during the last
century. The best protection from a market downturn is to have an investment
plan that reflects one’s goals, risk tolerance and ideal asset allocation. This
provides objectivity and discipline when markets are turbulent. Investors with
cash in their portfolio should buy, not sell, during a downturn. This reduces
one’s average cost, a strategy sometimes referred to as dollar-cost-averaging.

Rebalancing

Rebalancing a portfolio reduces its overall
level of risk and ensures it’s well positioned to maximize long-term profits.
Market downturns are a time to go back to basics. An investor’s personal
investment plan should include a target asset mix. As investments go up and
down, the percentages of each asset class will rise and fall and occasionally
go outside the set parameters. When this occurs, it means it’s time to
rebalance your portfolio to ensure it is invested according to the proscribed
mix. This process keeps investors on course. If stocks have lost their value,
then their percentage mix relative to the ideal cash position may be too low
and is rectified by buy more stock. The portfolio will benefit, as previously
discussed, by having lower average costs. Rebalancing should also be done
within the equities portion, ensuring investments in different sectors are on
target.

Taking Tax-Losses

Market pullbacks also give investors a chance to increase
after-tax returns at a later date by taking what is called a capital loss. Many
jurisdictions will allow investors to carry capital losses forward to be
applied against capital gains for tax purposes. Specific details should be
discussed with an accountant. Investors who have been holding on to dogs well
past their sell-by date should take advantage of market pullbacks to clean up
their portfolios and accumulate tax-losses. Another instance would be an
investor whose investment plans have changed and needs to reallocate their
asset mix. If they have considerable capital gains taxes coming up, perhaps due
to a real estate sale, it’s sometimes beneficial to take a loss during a market
decline, especially of stocks that no longer fit their overall investment
strategy.

Bottom Line

As surely as the sun will rise and set, stock markets will
fluctuate. The difference is that over time history has shown that equity
increases in value the most of all asset classes. A professional investment
plan and a good advisor relationship are the best ports in any storm. To profit
from a downturn, go back to basics and stick to your discipline.