3 Strategies To Prepare for a Major Stock Market Drop

What would you do if the market dropped by 50% tomorrow? 

Just the thought of your investments getting reduced by half might sound scary.

What’s even scarier? The history of stock markets tells us this scenario is very much possible – it’s happened twice since 2000!

However, if you have a long-term financial plan in place, you can minimize the impact of a major market drop on your retirement.

In this episode, Jeremy Keil shares 3 strategies to help you be better prepared for a major stock market downturn. He also provides a sneak peak into his upcoming webinar: Are You Prepared for a 50% Drop in the Stock Market?

Jeremy discusses:

  • Six financial risks every retiree should plan for
  • How to prudently allocate your money to short- and long-term investments
  • Effective ways to improve your tax situation during a market downturn
  • How to raise cash without having to sell your stocks
  • And more

3 Strategies To Prepare for a Major Stock Market Drop

1) Reap the Tax Benefits

When you sell investments during a downturn, your net capital gains will likely be lower, resulting in lower taxes.

This gives you an opportunity to:

  • Rebalance your portfolio: While rebalancing, you might need to sell some investments. So, if you’re rebalancing during a downturn, you can save money in capital gains taxes. Rebalancing your portfolio also helps you manage your risk level (discussed below).
  • Make Roth conversions: When you transfer your traditional IRA money into a Roth IRA, you’ll need to pay taxes upfront. However, these taxes will likely be lower during a downturn. Plus, when the market goes back up again, your investments will grow tax-free inside your Roth account!

2) Take on the Right Level of Risk

Whether the market is up or down, it’s always important to ensure you take on the right level of risk. The right level will vary depending on your personal risk tolerance and financial situation.

Perhaps this short story will help you understand the importance of choosing the right risk level…

Back in 2019, we worked with someone with a low risk tolerance. It made sense because they were about to retire.

But when we looked at their existing accounts, we were shocked to see nearly 85% of their wealth invested in stocks! As you all know, stocks can be risky investments. We helped them rebalance their portfolio right away and cut their risk level by nearly half.

Soon, the COVID-19 pandemic hit in early-2020 and markets dropped by 30%.

Did those clients need to worry about the market drop? Was their retirement affected significantly? Not really! Their portfolio was well-balanced and they had access to enough short-term funds — all thanks to choosing the right risk level.

Sometimes, it’s the opposite. People who are capable of taking on more risk might end up being too conservative with their investments. If that’s the case, then a market dip is the perfect time to realign your investments into the right level of higher risk for you.

Work with a financial advisor, evaluate your current financial picture, and decide the right risk level for YOU before investing.

3) Have Enough Short-Term Cash

What if the market is down and you need cash TODAY?

You would hate to sell your stocks and other investments at a market low, right? That’s where your short-term funds come into play.

Not all investments might be down at once. If you need to liquidate some of them, look for the investments that are up, flat, or that have not significantly dropped in value. After all, you don’t want to sell the most-suffered investments at a low price.

You can also turn to other funds, such as your bank money, an existing home equity line of credit, or a cash value life insurance. That way, you won’t need to sell any stocks to fulfill your short-term cash needs.

We also suggest cutting down some expenses, if needed. A budget cut is better than selling investments when they are 50% down.

Finally, you can stop reinvesting your dividends into stocks and let them accumulate as a source of short-term cash funds.

Remember, a Market Downturn is Only One of the Six Big Risks to Your Retirement

Many people think that market downturns are the only big risk to their retirement.

Yes, you should be concerned about the market – but don’t let your worry about one risk harm your ability to counter several other big risks. There are 6 big risks you need to plan for!

  1. Major market downturns
  2. Outliving your retirement money
  3. Low-interest-rate environments
  4. High inflation
  5. Changing tax rates
  6. Rise in healthcare costs

Related: The 7 Most Important Conversations for Your Retirement