Don't Forget These Two Techniques During Market Turbulence

Making the best of a bad situation.

Before I go any further, please allow me to share that it is with a painful spirit that I write this article.

Recent events in Ukraine, and now spilling into the surrounding areas as refugees stream out of the country, are truly painful to watch. It is my hope that the pressure being brought to bear on the situation can lead to a peaceful resolution just as quickly as possible.

However, for those of us affected more indirectly, in terms of our investments, we still want to do what we can to make the best of a bad situation. In this brief article, I simply wanted to offer a reminder about two techniques that I have already put to use in my own portfolio over the past couple of weeks.

Photo by Firmbee.com on Unsplash

Technique #1: Tax Loss Harvesting

First off, I hope it goes without saying that this technique only applies in your taxable investment accounts. It also relates to good asset location practices. Likely, you have both stocks and bonds in your portfolio. In general, you want to place a higher weighting of stocks in your taxable accounts, and bonds in non-taxable accounts. Why? Among other things, it allows for greater use of tax loss harvesting.

Since the beginning of the year, many major stock averages are now down between 10-15%. As a result, you may, as you read this, have tax losses available to you on one or more of your holdings. Due to wash sale rules, you can’t simply sell one security at a loss and then buy it back again right away. No, you have to wait 30 days to do so.

Here, though, is where one of the many strong points of ETFs come into play. Since ETFs hold baskets of assets, you can sell one ETF at a loss and immediately purchase a different one that, in the big picture, keeps you fairly similarly positioned in the market.

Last Thursday, 2/24, I did just that in my own taxable account. Due to the extremely sharp drop early-morning drop in the market, shares I held in iShares Core Dividend Growth ETF (DGRO) and Vanguard High Dividend Yield ETF (VYM) dropped sufficiently that I had tax losses available to me in both cases.

As it happens, I recently wrote an article on Seeking Alpha reviewing Schwab U.S. Dividend Equity ETF (SCHD). Not only did I come away highly impressed with this ETF, some backtesting on PortfolioVisualizer.com revealed that SCHD has performed quite similarly to, say, a 50/50 mix of DGRO & VYM.

And so, I sold my shares of both DGRO and VYM and swapped them into SCHD, realizing some valuable short-term tax losses in the process.

Now, bear in mind that, once 30 days have passed, I can swap back if I wish. In other words, if there is a continued dip in the market, I can execute that trade in reverse. Whatever the case, I will have realized at least some tax losses without meaningfully adjusting the overall composition of my portfolio.

Technique #2: Good-Till-Canceled (GTC) Limit Buy Orders

During times of market dislocation, such as we are experiencing now, extreme price volatility can also open the door to opportunities.

Again, please allow me to emphasize that ETFs have a significant advantage over mutual funds when it comes to this. Since mutual funds only price once per day, at the market close, they offer no opportunities to take advantage of intraday moves in pricing.

With ETFs, however, just like individual stocks, you can take advantage of volatility by setting GTC limit buy orders to automatically acquire shares if they fall to a level at which you would be happy to buy.

I benefited from this technique as well this past Thursday, 2/24. In my case, my chosen target was iShares Core S&P Total U.S. Stock Market ETF (ITOT). As a total U.S. market ETF, this makes a nice candidate for a “big picture” buy of the U.S. market. As it happens, the 52-week high on this particular ETF is $108.15. I made the decision a couple of weeks back that, should this particular ETF drop a full 15% from the recent peak, I wanted to buy some. That math equated to a price of $91.92, and that is where I set my GTC limit buy order.

Early that morning, the price fell below that level, my order triggered, and I now own additional shares of ITOT at a price I am happy with.

Conclusion

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