Making Lemonade by Jonathan Clements
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. As with Roth conversions, 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.
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. As with Roth conversions, 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.
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