3 Hail Mary Plays That Could Bring Your Stock Portfolio Back From the Brink

With the S&P 500 down nearly 10% in the last month and 23% in 2022, your investment portfolio probably isn’t having the best year. And while that doesn’t feel good, enduring down markets is simply part of investing.

But if you find yourself in a deeper hole than most, there are some strategies you can deploy to breathe life back into your portfolio.

While none of these will magically turn your losses into huge gains overnight, these investment moves have the potential to set you up for long-term success.

Image source: Getty Images.

1. Max out your Roth IRA contributions

With the market down severely, a Roth IRA is more valuable than ever. Roth IRAs are retirement accounts that allow you to grow your wealth tax-free. Unlike the 401(k) that allows you to contribute pre-tax money with the hopes of paying lower taxes once you retire, Roth IRAs let you allocate post-tax capital but avoid paying any taxes once you withdraw in retirement, regardless of how much your account has grown.

While the near term looks gloomy for stocks, it’s hard to believe that the market won’t be significantly higher a decade or two from now. By investing via a Roth IRA, you’ll enjoy all of that growth without ever paying a dime in taxes.

Because of how advantageous this strategy is, the Internal Revenue Service has placed an annual contribution limit of $6,000 (or $7,000 if you are 50 or older). I’m an advocate for maxing out your contributions every year, but given the discounts in the market today, this seems like a must-do strategy this year.

2. Look for beaten-down stocks

While bear markets cause many to panic, smart investors understand that when stocks go down, opportunities to buy companies at steep discounts emerge.

There are plenty of downtrodden companies to choose from, but you don’t have to go searching for diamonds in the rough to generate alpha (market outperformance).

Take Microsoft (NASDAQ: MSFT), for example. The software giant is one of the most profitable companies on the planet and yet is down nearly 30% in 2022.

As interest rates continue to rise, companies that can fund their future growth through their own profitability are likely to outperform. While it’s tempting to swing for the fences with highly depressed and unprofitable stocks like Roku (NASDAQ: ROKU) or Teladoc (NYSE: TDOC), I believe financials will separate the huge winners from the unfortunate losers in this economic cycle.

Consider Microsoft’s top- and bottom-line growth over the last four years:

Year

Revenue Growth %

Net Income Growth %

Net Profit Margin %

2019

13.91

136.80

31.2

2020

13.95

12.85

31.0

2021

17.53

38.73

36.5

2022

17.96

18.72

36.7

Source: Microsoft annual reports. Table by Author.

Another highly profitable stock that has been punished so far in 2022 is Alphabet (NASDAQ: GOOG). In the most recent quarter, the company grew its revenue by 23%, and it has nearly $125 billion in cash on its balance sheet (including short-term investments).

Most notably, the Google parent company trades at a remarkably low price-to-earnings ratio of 18.

For context, here’s how Alphabet’s valuation compares to its peers:

GOOG PE Ratio data by YCharts.

3. Consider a small allocation to Bitcoin

While I believe the two strategies above have great potential to resuscitate a struggling portfolio, neither is particularly brazen.

For risk-tolerant investors, a small allocation to Bitcoin may be the swing-for-the-fences play to drive future outperformance in the years to come.

It’s important to do your research before diving into the crypto world, but I believe the grandfather of digital currencies could return to all-time highs in the next few years once the macroeconomic headwinds settle.

While Bitcoin has fallen nearly 60% in 2022, the cryptocurrency is no stranger to volatility. In fact, it has crashed by over 50% seven times before the most recent crash. More importantly, it has recovered from each of those crashes to achieve new all-time highs.

Trading around $20,000 today, such a recovery would mean Bitcoin could surge over 300% in the coming years.

This is obviously a risky strategy, and any allocation to Bitcoin should be a small percentage of your overall portfolio. But if you’re looking for opportunities to dig yourself out of a hole, a small bet on the potential future of digital currency could be highly rewarding.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Mark Blank has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Microsoft, Roku, and Teladoc Health. The Motley Fool has a disclosure policy.