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None of us is smarter than the collective wisdom of all investors, as reflected in today’s share prices. So, why did investors dump stocks, causing the S&P 500 to plunge 10.5% over two days? The selling was likely driven by both a distaste for uncertainty and an expectation of slower economic growth, though we don’t know the precise combination of those two factors.
Investors hate uncertainty, and there’s a lot of that right now. Still, that uncertainty should fade in the weeks ahead. More worrisome is investors’ collective bet that economic growth will slow and perhaps turn negative. That would put a dent in corporate profits, and hence stocks should indeed be worth less. Unless the Fed cuts interest rates or the politicians in D.C. take steps to spur economic growth, the current stock market slump could drag on for a while.
But however this decline plays out, you never want to let market mayhem go to waste. Here are six steps to consider:
Take tax losses. If you have stocks or stock funds in your taxable account that are below your cost basis, you might realize the capital loss, which you can then use to offset realized capital gains and up to $3,000 in ordinary income each year. What if stocks fall further? You could always do another round of tax-loss harvesting. The only costs are transaction expenses, which are likely minimal, and some modest extra complexity at tax time.
Sell unwanted winners. Got individual stocks or stock funds in your taxable account that you’d like to unload, but you’ve been reluctant to sell because it would trigger a capital-gains tax bill? Thanks to the market decline, the potential tax bill may now be smaller, and you may even be able to offset the gains with realized losses.
One caveat: Keep in mind that if you bequeath appreciated taxable-account investments, your heirs will get a step-up in cost basis and hence the capital-gains tax bill will disappear—a key consideration, especially for older investors.
Convert to a Roth. When stocks plunge, another popular strategy is to convert the stock portion of a traditional IRA to a Roth. Yes, that’ll result in a tax bill, but it opens the door to earning tax-free gains as the stocks purchased within the Roth rebound. Assuming you pay the tax bill using non-IRA money, you’ll boost the after-tax value of your retirement-account savings—and effectively increase your stock exposure.
But is this the right time to convert? If you knew the stock market would fall further, it would be smart to wait because you’d later be able to convert a larger portion of your traditional IRA for the same tax cost. Problem is, we don’t know, so we’re compelled to become market-timers.
One strategy: Split the difference, converting part of your traditional IRA now and more later. But I’d probably hold off for a bit. The fact is, for the year to date, the broad U.S. stock market is down just 14%, while the broad international market is down just 2%. Despite all the handwringing, this hasn’t exactly been a blood bath.
Rebalance. Market declines offer the chance to rebalance—selling bonds and cash, and buying stocks, to bring your portfolio back into line with your target percentages. That would set you up well for a stock market rebound. Such rebalancing is typically best done within a retirement account, so none of the trades generates a tax bill. But as with Roth conversions, I wouldn’t be in a big rush because the relatively modest stock market decline suggests we aren’t currently looking at some great buying opportunity.
Straighten out badly diversified portfolios. Lots of U.S. investors entered 2025 with portfolios heavily tilted toward large-cap U.S. growth stocks. Those stocks have taken it on the chin this year. Would you prefer to be better diversified, with more allocated to small, value and foreign stocks? Amid the chaos of today’s market, perhaps you’ll find it emotionally easier to bite the bullet and make the trades needed to straighten out your investment mix. Again, for tax reasons, such trades are best made within a retirement account.
Save more, spend less. As share prices fall and expected long-run returns rise, saving and investing become more appealing, and that might prompt you to cut back spending and divert those dollars to your portfolio. Indeed, the ability to vary spending is a lever available to almost all of us, but one that doesn’t get nearly enough attention.
As always, very many good ideas for us to consider. I have chosen to be very patient and will wait for the next long Bull Market. Thanks Jonathan for your thoughtful articles and keep doing the best you can, with your great attitude. We appreciate all your articles.
Good one. We are in the process of doing two of the six-rebalancing and Roth conversions. While they are, in a sense, reactive, both are part of our plan, triggered by guardrails. As suggested, the Roth conversions will be part of our planned conversion this year and we will do another later in the year when annual income becomes clearer. I think the point about the hand wringing is also a good reminder for perspective The U.S. stock market being down 14% is a tad different than 2008 when my 401k became a 201k down 56%. That period has been the foundation of our retirement approach with a safety first strategy supported by a financial advisor with a conservative approach specializing in retirement advice which has provides peace of mind during the current period.
Jonathan, Thanks for sharing your clear eyed vision for navigating and surviving the market meltdown.
Selling could have been driven also by policy moves that were unexpected. So it was time to “Sell first and ask questions later.” Narrative is changing from slower growth to possibility of stagflation or a recession. Investors may be thinking they can buy back later at lower prices.
It’s also nice to step back and look at the big picture when chicken little starts up.
Thanks, Jonathan – very timely advice! I’ve been thinking of doing an in-kind Roth conversion (no required RMDs yet).
While researching roth conversions, I ran across a new rule released in July, 2024 that may impact a few people that have multiple Traditonal IRA accounts. The new rule requires you to fulfill your total aggregated IRA RMD across all your IRAs before converting to a Roth IRA.
Historically, you could satisfy the RMD for a specific IRA and then convert any remaining balance within that same IRA to a Roth IRA. However, the new rule requires you to fulfill your total aggregated IRA RMD across all your IRAs before converting to a Roth IRA.
Here’s the link to Edd Slott’s article:
New Rule: All IRA RMDs Must Be Satisfied Prior to Doing a Roth Conversion
November 04, 2024
“Yes, you read that title correctly. This rule was confirmed in the 2024 final SECURE Act regulations, released this past July [July, 2024]. If a person has multiple IRAs, even if they are held at different custodians, the total aggregated IRA required minimum distribution (RMD) must be withdrawn before any Roth IRA conversion (or 60-day rollover) can be completed. [This does NOT include RMDs from work plans like a 401(k).]”
“Aggregation rules tell us that RMDs for each IRA must be calculated separately, but the aggregated total may be taken from any one or more of a person’s IRAs. The first dollars distributed from an IRA in a year when RMDs are due are considered the RMD. In addition, we know that RMDs cannot be rolled over or converted. Ergo, the RMD must be taken prior to any conversion – sequencing matters.”
https://irahelp.com/slottreport/new-rule-all-ira-rmds-must-be-satisfied-prior-to-doing-a-roth-conversion/#:~:text=New%20Rule:%20All%20IRA%20RMDs,Ed%20Slott%20and%20Company%2C%20LLC
So you cannot take that RMD from a traditional IRA and roll it over into a RoTH IRA? You have to take the RMD distribution as cash and then do a separate ROTH conversion?
There are effectively two tax bills — one for the RMD and one for the Roth conversion. In other words, you can’t avoid the RMD tax bill by making a Roth conversion for the sum involved.
I would hasten to add that, so far at least, the bonds in our 60/40 portfolio are providing the comforting ballast that we usually expect (unlike 2022). Our diversified holdings are down something like 6-7% from where they started the year, hardly a bloodbath. Like others, I’m mostly in a wait-and-see mode the right now; at this point, big changes seem uncalled for, but a few tweaks here and there feels like a good idea. After all, “you never want to let market mayhem go to waste.” Love it!
I do think the spending one will be the most important, and the least appreciated. If there’s on thing Americans seem to hate it’s lower their consumer expectations, especially when it’s necessary.
Jonathan, thanks for this. Nice to have constructive advice regarding some positive moves during the current chaos.
Great advice as always, Jonathan. Spending less is something totally under your control. Paying off high interest credit card debt is something else to consider.
Very timely. I don’t have any taxable losers to sell, but I will start my Roth conversions for the year on Monday. My mutual funds will have repriced with Friday’s carnage. I spoke with my tax advisor on Friday as I am in the final steps of completing my 2024 return. Since our yet to be discussed 2025 plan would include Roth conversions, no reason not to start doing them now. Will have opportunity to do more as the year plays out. A different plan than I used for March 2020, but I am in a different situation. I sold my losers in 2020, took the tax loss and reinvested. Went from 60% equity to 100% equity in IRA accounts. In 2H 24, went to 90% equity 10% TIPS in IRA.
At this point, it feels a bit premature to make any financial moves—big or small. There’s just so much uncertainty. Will my Social Security benefits still be taxed? Will income under $150,000 remain subject to taxation? And if income below that threshold becomes tax-free, will IRA withdrawals be included—or will they still be counted as taxable income under the old rules?
And beyond that, who knows what’s coming? There’s always talk of a broader reset—maybe the government shifts to funding itself through a VAT tax, or ramps up tariffs instead. With so many moving parts, it feels prudent to pause. So for now, I’m holding off on making any major assumptions or adjustments.
But then again… is that really the wisest approach? When I don’t know what the right move is, I often fall back on a 50/50 strategy. It’s a bit of a Solomon move—split the baby, hedge the risk. Do something, but not everything. That middle path has often served me well when the future is cloudy.
Still, for now—I’m just going to sit on my hands and wait for a little more clarity. WDH
Of course, Solomon’s strategy was really one of forcing someone else to make a 100% decision, to expose a hidden reality. So the analogy breaks down.
“One strategy: Split the difference, converting part of your traditional IRA now and more later. I wouldn’t be in a big rush because the relatively modest stock market decline suggests we aren’t currently looking at some great buying opportunity.”
I am using the same strategy as I did during the COVID rapid decline when I rebalanced at certain target percentage declines. Friday I saw that my wife’s target date fund was most likely heading for a 10% drop from its December high (it is down 11%) so I moved forward three months of conversions. Her fund is rather bond heavy so it is less likely to see a 15 or 20% decline, and if it does I think the markets will be in COVID like bear territory. This means that I picked up a few more shares in the conversion for the same dollar amount. I now have until August to wait to see if it drops to a 15% loss to move forward three more months of conversions. I don’t consider this market timing. Since I don’t know when the market will hit bottom, and I’m not greedy I’m taking advantage of the discount the market is offering now, and still have funds left to meet my full year target dollar conversion amount if the conversions are at a greater discount later this year.
Also this money is to be changed over to Vanguard Total World ETF, so the stocks I will buy will also be on sale. This money will be the last to be tapped by us, if at all.
Jonathan – you have historically been a thoughtful voice of moderation, providing succinct, actionable steps that readers can employ during periods of upheaval in the investment market.
Today’s list is a gift, particularly for younger investors who may be experiencing their first taste of broad-scale market volatility. Thank, you!