The market is Down! What should I do?

Diane and I have each been financial advisors for a combined 62+ years of financial services experience and as such have lived through notable periods of up and down market movements. This not only pertains to the markets themselves, but living through the emotional impact that significant market declines can have on clients. These events include the dot com bubble and crash in 1999-2000, 9/11/2001, the Great Financial Crisis in 2008-2009, Covid in 2020 and the significant market declines in 2022. While each of these had its own characteristics, they do have one very important thing in common:

They all ended.

That’s important because it’s a very difficult thing to remember when you are in the middle of a decline like the ones above, or sometimes even during a more garden variety “normal” decline.

When markets are down 10% or more (which by the way will happen many, many more times over my lifetime) we naturally receive a higher volume of calls and email, with varying versions of “what should I do?”. Our clients are fantastic, and many have been through this with us many times before, but it’s still a natural question to wonder whether changes should be made.

Keep in mind that much like it’s best to prepare for winter before it actually snows, the time to be prepared for negative markets is when things are good. See my accompanying article on what to do in positive markets for examples of this kind of preparation.

If we are in the middle of a bad market, here’s how we counsel our clients:

First, keep it in perspective. Markets go up and down, and this is one of the down times. Funds you have in the market would not have been meant to be accessed in the short term, so this should not cause an immediate issue. Yes, it’s painful to see the decline I your values but try to remember that it is temporary.

It’s almost certainly NOT different this time. Whether it’s politics or geopolitics or interest rates or the economy, etc., it has all happened before, albeit differently. Up and down movements and markets are normal and should be expected, and markets can recover.

Put in the context of your overall plan. When we see events like the ones above, one thing we do for clients is rerun our planning numbers based on the new values. It is extremely rare when a short term market decline would have an impact on someone’s long term retirement plan, which could be over the next 30-50 years. Very occasionally, if we have a client who is approaching retirement, we can demonstrate that even in the worst of declines, the worst case is potentially a few more years of work or a slightly lower spending assumption, NOT a destruction of the whole plan.

In non-qualified accounts you can take advantage of tax loss selling. This may allow you to sell securities and replace with other similar securities for at least 30 days but take the tax loss. These losses might also be used to offset gains in other accounts (always consult your tax advisor).

Down markets can be great times to consider Roth IRA conversions. In short, you can convert when markets are down, pay the tax on the converted amount and then when markets recover the converted amount will be in the tax free forever account. This is a great tool for intergenerational planning (consult your tax advisor).

Reacting to negative markets by trying to protect yourself and get more conservative can result in locking in losses that won’t be easily recovered when the market does. It may make you FEEL better, but it’s probably the wrong move. We’ve had clients do this in the past, despite our advice and I’ve never seen it be a move that was best for the long term.

Our job at times like these is to think the opposite way that you are. When markets are down, and you ask what can be done to protect you against declines, we look at it the other way. In theory, the protection should have happened when markets were up. When markets are down, we are thinking about rebalancing portfolios, adding to securities that are “on sale” and lower in price, trying to position for when the market recovers.

In fact, as mentioned in the “Dollar Cost Averaging” article, if you are a long term investor and especially if you are systematically saving, down markets can be a gift. These markets give you the opportunity to accumulate additional shares (as illustrated in the article) at lower prices.

The key is to fight against natural tendencies and to stay calm. Negative markets and market shocks can certainly be frightening, but with preparation, planning and mindset they can also be tremendous opportunities for long term investors.