Actions To Take During Market Downturns
“But I’m not even trained for ‘mild’ action!”
- THE LEGO MOVIE written by Phil Lord & Christopher Miller, directed by Phil Lord and Christopher Miller
(3 minutes)
The market’s taken a beating lately. If you’ve been watching your portfolio go down, I have some good news. There’s an actual upside to this madness! Think of this as a chance to clean up your portfolio, possibly save on taxes, and prep for better days ahead. Here are five actions (or non-actions) you can take during market downturns.
DO NOTHING
When things get rough, one of the best moves you can make is to stay focused on your long-term goals. Perhaps you don’t need access to this money for ten more years. If so, then sitting on your hands is a viable option. If you don’t need to sell anything at this moment, then you’re not locking in losses. Never forget why you bought these investments in the first place.
You might have securities that pay dividends and/or interest. For some, this is an important part of their portfolio. Making moves could jeopardize those payments.
TAX LOSS HARVESTING
Nobody wants to sell an investment at a loss, but hear me out. If you’ve got capital gains (A.K.A. profits), selling a loser could actually work in your favor come tax time.
You can use losses to cancel out your gains—up to the full amount. What if your losses are bigger than your gains? You can knock up to $3,000 off your ordinary income each year. Bonus: this is also a chance to ditch under-performers or rebalance a too-concentrated portfolio.
If you sell a current loser, you can turn around and buy something else as long as the IRS doesn’t deem it to be “substantially similar.” Keep an eye on those wash sale rules so you don’t accidentally void the deduction.
RETIREMENT BOOST
Buying when prices are low? That’s classic investing wisdom. If you’ve got room to stash more into your 401(k) or IRA, this might be a good time to do it. You’re setting yourself up for any recovery that follows. I don’t have that vaunted crystal ball, so I don’t know when the low point is in the markets. But again, if you’re thinking ahead ten years, there’s a good chance that the markets will recover before then.
Same goes for your HSA. If you’ve got extra cash in there beyond what you’ll need for near-term medical expenses, consider investing it. Growth in that account can go toward future healthcare costs, tax-free.
EDUCATION BOOST
College savings can get a boost too. Market dips mean you’re buying low here as well. If you really want to supercharge a kid’s 529 plan, you can use the IRS’s 5-year gifting rule: contribute up to $95,000 (or $190,000 for couples) in 2025 without touching your lifetime gift tax exclusion. That’s a serious head start on tuition.
ROTH CONVERSIONS
This one's a hidden gem. If your IRA’s balance is down, converting it to a Roth now means a potentially smaller tax bill. If/when those investments bounce back inside the Roth, that’s tax-free growth you don’t have to share with Uncle Sam.
Just make sure you’ve got the cash to cover the taxes, because those are due the year you make the conversion.
THE FINAL SCENE
Don’t Panic, Plan.
If you’re not selling and your plan is solid, you might not need to do anything right now. Sometimes the best move really is to wait it out. Think of your goals. But if you are looking to make the most of a messy market, these strategies could help you come out ahead.
This is where I tell you that this is not tax, legal, or even investment advice. You should seek a professional before making decisions.
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