The Joy of a Down Market

Note: throughout this article, I use the term stocks, securities, and assets interchangeably. That is because these ideas apply to all sorts of investments ranging from stocks, bonds, etfs, mutual funds, and so on.

The market is down

I’m going to tell you something you already know. Over the past few weeks, the market has been down.

As of March 22nd, major U.S. stock indexes have reported losses during the month. Over that time frame, the S&P 500 is down over 5%, the Dow slid over 3%, and the Russell 2000 (small-cap stocks) is down over 5%. Even more frustrating, these losses have wiped out early-year gains, resulting in overall year-to-date losses for these indexes since January 1st, 2025.

You probably don’t need me to report this news to you. If you track your investments regularly, I’m sure you’ve seen these losses. Even if you don’t, I’m sure you’ve seen or read the news. Multiple days of greater than 1% losses make for great headlines, despite their disheartening nature.

Yes, the market is down. But it’s been down before and will be down again. We’ve seen this before. Multiple times and often much worse.

But yet there is hope. Not only hope for better days ahead, but hope in the actions we can take today. Don’t get me wrong, I’m not here to ignore the bad news. I’m here to discuss it straight on and make smart, rational decisions. In that spirit, here are a few ideas and actions we should consider. Believe it or not, you can find joy (if not comfort) in a down market.

The sun also rises

Remember this is temporary. It could last a few days, months, or even stretch out longer than a year, but it is still likely temporary. More on this later, but for now it’s critical to remember that panic should be avoided. Panic usually leads to rash decisions and poor long-term returns. Let me explain.

Did you know that if you stayed invested in the S&P 500 from 2002 to 2021, you would have seen a ~650% growth over that time? That equates to an annual return of over 9.8% compounded over 20 years! I’m sure if you were guaranteed that return over the next 20 years, you would surely take it.

However, if you missed out on the best 10 days (not years) during that time, you would have ended up with much less. In fact, missing the best 10 days resulted in an ending balance less than half of those who stayed invested the entire time. Half! Just because you missed 10 days over the 20-year span.

A cynic would wisely point out that it would be impossible to time the market that poorly. How could someone be that unlucky? However, when we take a closer look at the timing of the 10 best days, missing out on them actually does seem possible. The fact is, all 10 of the best days in that twenty-year span happened during major market downturns. These were in 2008, when the real estate crashed, and in 2020/21, during the COVID pandemic crash. This means that all 10 days occurred as markets recovered from crashes. If you think about it, many investors tend to panic when markets turn sour. This panic inspires investors to sell investments, move into cash, and wait until conditions improve. The problem is, these market corrections can happen in large single-day bursts. The cumulative effect: investors sell at low prices and wait for the “crash to stop,” only to sit on the sidelines during days of massive gains.

Remember this. Every day, despite gains or losses in the stock market, hundreds of millions of employees, business owners, and entrepreneurs go to work. They work towards making better products and services to sell in the ultimate goal of making money for the company and shareholders (i.e. you!). Markets will certainly drop from time to time and, based on the history of the market, will always trend up over the long haul. At least it always has.

The sun also rises. Remember to be on the front porch when it happens, not in the basement.

Dollar-cost averaging

This point is more quantifiable.

When markets are down, that means the prices of stocks (and funds) are lower. You might have heard this as “stocks being on sale.” That is, while everyone is worrying about not being able to sell stocks at a higher price, you can focus on buying stocks at a lower price. Warren Buffett summed this up in a quip, “be fearful when others are greedy, and greedy when others are fearful.”

Some investors will pursue advanced ways to buy stocks during these times. They might sell non-equity assets in order to purchase more stocks, or even borrow money in order to buy more, known as leverage. These techniques are fine for advanced investors, but what about everyone else?

This is when dollar cost averaging can help. Good news: if you regularly contribute to a retirement plan or other investment account, you’re already doing it. By investing regular amounts at regular intervals, you’re already investing when markets are down. Of course, you’re also investing when prices are high, but the regular amounts spread out month to month ensure that you’re getting a wonderful average price for your investments. When prices are more volatile, average sounds pretty good!

So when markets are down, rest assured your regular investment is gobbling up even more stocks. More stocks mean more returns when markets eventually recover.

Read more about dollar cost-averaging here.

Tax-loss harvesting

If you own securities in a taxable brokerage account, tax-loss harvesting can help you benefit from market downturns. This technique involves selling securities at a loss in order to save on taxes.

Important: this only works in a taxable brokerage account. A taxable brokerage account is a liquid account used to buy and sell stocks whenever you choose. You’ll pay taxes on any interest and dividends earned every year, and whenever stocks are sold at a gain. These are NOT IRAs, 401(k)s, 403(b)s, TSP accounts, or any other type of tax-deferred account. Read more about brokerage accounts here.

When it comes to selling stocks in a brokerage account, you may have to pay capital gains taxes. For instance, if you buy a stock at $10 and sell it at $20, you will need to pay capital gains taxes on the $10 gain you realized. The amount of capital gains tax varies depending on how long you held the stock. If you held the stock for under a year, the $10 gain is taxed at regular income rates. If you held it for longer than a year, it is taxed at much more beneficial long-term capital gains rates.

During market downturns, you may have stocks that are selling below what you paid for them. For instance, if the same stock you purchased for $10 is selling for only $5, you have a chance to harvest some tax loss. If you decide to sell the stock at $5, you can claim a $5 capital loss. The treatment of capital loss is similar to capital gain (short-term/long-term), but the beauty is that any type of capital loss can actually offset any type of capital gain. The math is a little complicated, but the end result that is capital losses have a superpower when it comes to tax savings. That is, capital losses have the potential to offset multiple types of income: short-term capital gain, long-term capital gain, and EVEN normal income up to $3,000 a year. Also, should you have even more losses, they can carry forward to future years.

Note: If you sell a security and intend to report the loss, you cannot repurchase the same (or substantially similar) security within 30 days and still claim the loss. This is known as the wash rule. Most investors find a different security that meets their needs in order to avoid it.

More on tax-loss harvesting here.

Conversions are on sale

If you have assets in a retirement account (401(k), 403(b), IRA, TSP, etc.), you may be interested in eventually converting those assets to Roth accounts. In short, this technique converts traditional tax-deferred savings into tax-free Roth savings. The only catch is you have to pay taxes on the amount converted in the year the conversion took place. So how do down markets help?

When the market is down, it’s important to remember that you still own the same amount of securities. That is, if you own 100 shares of a stock and the price drops by $5, your shares are now worth $500 less but you still own 100 shares.

Let’s say you own those 100 shares in an IRA account and you want to convert them to a Roth IRA. When you execute the conversion, the entire value of the shares is reported to the IRS as income. You then pay normal income tax on that amount.

Using the above example, if you execute the conversion when prices are down, you would end up with $500 less taxable income while still converting the same amount of shares (100). This means that lower stock prices make these conversions cheaper and possibly more efficient if you’re trying to stay within a marginal tax bracket. Other conditions should be considered, such as current income situations and tax law, but the effect still remains. Lower prices mean lower taxes on conversions.

The case for diversification

In the opening, we talked about three main asset classes of US stocks: large cap, the Dow Jones Industrial, and small-cap stocks. These indexes are very common and, yes, they are all currently suffering losses on the year. However, it’s important to remember that they are not the only asset classes available to you.

There are actually many asset classes that have had better luck in 2025. Corporate bonds, for instance, are up over 2%. International stocks are up over 7%. Gold is up over 13%. Even the often overlooked asset class of commodities is up over 7%.

When we consider a down market, we’re usually only talking about the main US categories we discussed before. This is because they are the most commonly known and used investments in the US. Also, most people are familiar with the S&P and Dow as representatives of the stock market as a whole.

It’s important to consider that these common asset classes, despite varying returns, usually move in the same direction at the same time. They move up at the same time and down at the same time. This behavior is known as positive correlation.

As noted in this section, not all asset classes have a high degree of correlation. While international stocks can be somewhat correlated with US stocks, sometimes they move completely independently. Precious metals, bonds, and commodities have much lower or even negative correlations to US stocks, making them a commonly used diversifier. Even Real Estate Investment Trusts (REITs), which have neutral returns for the year, have somewhat lower correlation to major stock market indexes.

If you’re someone who has a broad diversification in your portfolio, your losses this year probably look much different than those of someone who only owns the S&P or total US stock market. Of course your broadly diversified portfolio might have lagged the S&P last year. Also, there’s no way to tell how it will perform next year. This is where diversification can help. No one can predict which asset class will outperform, we only know that lower-correlated asset classes move differently at different times. History shows us that these classes take turns providing outsized returns. Owning all of them, pursuant to your individual investment needs, ensures you can enjoy the higher returns of other asset classes while being protected when more common asset classes lose value.

The hope of recovery

“Don’t just do something, stand there.”

This witty quote is attributed to many people dating back to the early 20th century, but has gained popularity in the world of passive investing. For investors, it means: don’t react quickly when markets become more volatile. The volatility is part of the system; it’s built in. Stay focused on your long-term goals and let the market play out as it always has.

Looking back over historical volatility, this advice is easy to follow. All bear markets, despite their severity, eventually recover and grow. According to this article from Morningstar, historical losses of 10-20% typically recover within a few months. More severe losses of 20-40% can take over a year. Finally, the most crippling losses of over 40%, while very rare, can take years. Yet they still recover.

As I said, hindsight supports the wisdom of staying invested during market downturns. However, living through these events is much more difficult. Each downturn, including the most recent COVID related setback, felt uniquely different and severe. That is because there is no way to know how low the market will drop, when it will begin to rise, or how long it will take to recover altogether. The unknown is real, and it can last for months or years. It can cause incredible amounts of anxiety when it is happening.

And yet, the market has always recovered. As I said before, every day hundreds of millions of people go to work and make goods and services for the world. This effort continues no matter the market conditions.

Stay grounded, stay focused on your goals, stay hopeful, and look for peace (or possibly some joy) in the down market.