Erin Scannell, CFP
Erin Scannell, CFP, CEO of Heritage Wealth Advisors, which Forbes ranked the top financial advisor in the state of Washington in 2022 and 2023, Mercer Island, Washington. Heritage-Wealth.com
Financial advisors like to remind investors that the best action to take when stock prices plunge is…nothing. Sitting tight prevents you from making foolish mistakes such as selling long-term investments after they’ve fallen in price.
Better: Do something! Taking some constructive action during market disruptions can make you feel safer and more empowered…position your portfolio for a healthy recovery…and improve your long-term returns. Three steps from financial advisor Erin Scannell’s market-disruption playbook…
Rebalance winners and losers. Take gains from assets that have risen in value, and invest that money in your out-of-favor assets. Add only to positions that are fundamentally sound, as defined by cash-flow statements and balance sheets. Example: In 2022, the S&P 500 fell 19%, but several stocks that my clients owned performed well including T-Mobile (up 22%) and iShares North American Natural Resources ETF (up 27%). We took profits from those positions and invested them in our biggest losers that year including Amazon.com (down 51%) and Microsoft (down 28%).
Optimize your tax situation. If you no longer want to own stocks that have fallen, consider selling to harvest the tax loss. In addition to selling holdings that you no longer want, you might also consider selling holdings you love and either waiting 31 days to repurchase (to avoid wash-sale rules) or temporarily buy a replacement in the same sector or industry. If done correctly and systematically, this strategy can produce meaningful excess return to an otherwise buy-and-hold strategy, largely due to the tax savings it can produce. As you build up losses, you can use them to offset taxes on any capital gains for the year and then up to $3,000 ($1,500 if married, filing separately) in ordinary income.
Put trailing stop-losses on your highly volatile stocks. This free service offered at most brokerage firms automatically triggers a sale at a certain discount you choose to your stock’s current share price. Example: If the price of a stock you own plunges 15%, your position is immediately liquidated preventing deeper losses. Conversely, if the stock price rises, your stop-loss trigger price will move up as well, protecting some of your incremental gains.
