As market volatility surges, countless voices are cautioning against certain actions during a downturn. We concur with much of this guidance, which emphasizes avoiding market timing, resisting the urge to believe "this time is different," and not getting swept up in sensational news stories.
While this is great advice that we adhere to, there are actually things we can do to take advantage of the volatility to the downside. Here are a few that should be considered.
4 Things To Do During a Market Downturn
- Reduce Taxes with Roth IRA Conversions
- Maximize Gifting Opportunities with Reduced Values
- Harvest Tax Losses for Strategic Gains
- Elevate Your 401(k) Contributions for Greater Growth
Roth IRA Conversions
Roth conversions may appear to be a complex calculation, but what it really boils down to is whether you believe your tax rate in the current year is lower than what it likely will be in future years.
There are other great benefits to Roth IRAs around flexibility on withdrawing funds, being excluded from Required Minimum Distributions, and tax-free growth for a 10 year period for future generations, but the primary calculus for the current IRA owner is around timing of taxation.
If it is determined that the current year tax rate is optimal for paying the tax, you have the ability to convert specific shares of investments within your Traditional IRA and pay tax based upon the value of those shares on the day of conversion. This is key, and means you can take advantage of converting positions that are believed to be valued less today than they will be in the future, and thus pay tax on the reduced value.
For example, one of the holdings in our portfolios is the Fidelity Blue Chip Growth fund, which has an approximate annualized 13% return since inception back in 1987. However, due to the current market downturn, it has a reduced value year-to-date. This provides an opportunity to convert shares of this fund while they are down significantly, therefore reducing that tax paid, and letting the recovery of those shares happen in the Roth IRA. Other examples would include great companies like Apple, Amazon, Nvidia, etc... that have all sold off in 2025.
Maximizing Gifting
Similar to Roth IRA conversions, shares of stock or funds can be gifted out of an investment account, typically to the next generation, other family members, or friends. In 2025 every individual can gift up to $19k per recipient without having to file a gift tax return or have any other tax implication. Gifts above this $19k threshold can certainly be made but would then require a gift tax return be filed and would reduce the givers lifetime estate tax exemption.
Imagine the strategic advantage of gifting shares of stock or fund units when the value is temporarily low. By carefully selecting the amount to stay within the annual gifting limit, you set the stage for a potential windfall. As the market rebounds, the true worth of your gift blossoms, all while adhering to gifting regulations. This savvy move not only maximizes your generosity but also enhances the future financial landscape for your loved ones.
Tax Loss Harvesting
Tax loss harvesting is a strategy that can change an investment that has lost value into a tax winner. It is only applicable to non-retirement accounts that are subject to short, and long-term capital gains tax rates.
In a nutshell, tax-loss harvesting allows you to sell investments that are down, replace them with reasonably similar investments (but not exactly the same), and then offset realized investment gains with those losses either in the current year or in future years if the losses are carried forward. The end result is that less of your money goes to taxes and more may stay invested and working for you.
An example here would be selling a fund that seeks to passively replicate the exposure to the S&P 500 and replacing it with a total U.S. stock market fund. While these are similar in many ways and highly correlated, they are not exactly the same. By doing this you are not timing the market, but rather shifting exposure and taking advantage of the tax loss harvesting opportunities present during the market downturn.
More volatile markets, like we experienced in 2020, 2022, and this current period in 2025 can be an opportunity to create what we call a "tax savings account" that can balance out future gains for years to come.
Increase 401(k) Contributions
Consistently contributing to a 401(k) is one of the easiest and most tried and true methods of accumulating wealth in a tax-efficient manner. And the sooner you begin, the better.
Consider the following comparison:
Investor A starts investing $5,000 annually at age 25 and stops contributing at age 35, having invested $50,000 total over a short 10 year time period. Their investments compound at a 7% annual rate.
Investor B starts investing the same $5,000 annually at age 35 and continues until age 65, contributing a total of $150,000 over a much longer 30 year time period. Their investments also compound at an annual 7% rate.
How do these two Investors compare at age 65?
Investor A's future value: $525,976.84
Investor B's future value: $472,303.95
Investor A's investment is worth $53,672.89 more than Investor B's at age 65, despite Investor A contributing $100,000 less ($50,000 vs. $150,000). This highlights the power of starting early and allowing more time for compounding.
This get's really interesting in times of volatility where increasing the investment amount through 401(k) contributions has a greater return potential where the money invested is going in at reduced values. So when the markets are not at all time highs, increasing your savings rate can have a magnified impact over the long-term and tilt the compounding equation in your favor.
If any of these ideas resonate, please don't hesitate to reach out and schedule an appointment to review your situation and discuss the possibility of implementing any of these.
We wish each of you a happy start to spring and look forward to connecting soon.
Stephen Heitzmann, MSF, CPWA®, CRPC®
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