7 Smart Money Moves When the Stock Market Is Down

Market downturns can be unsettling, but they also can present opportunities to build your wealth. Instead of reacting hastily, consider implementing strategies that align with your long-term financial goals.

By staying informed and proactive, you can navigate market volatility with confidence. Here are seven potentially smart money moves to consider when the stock market is down.

1. Reassess your risk tolerance

Market fluctuations can reveal your true comfort level with investment risk. It's important to evaluate whether your current investment strategy aligns with both your financial goals and your level of emotional resilience.

For example, if you're nearing retirement and the market downturn has spooked you, it might suggest that you should consider taking a more conservative approach to investing.

Regularly reviewing your risk tolerance ensures your investment choices remain appropriate over time.

2. Buy more shares

When markets fall, it can offer the opportunity to purchase quality stocks at reduced prices. Investing during these periods allows you to acquire more shares at a lower cost, potentially enhancing future returns.

This strategy is sometimes referred to as "buying the dip." It requires careful analysis and a focus on long-term objectives. Consulting financial experts or conducting thorough research can help identify promising investment opportunities during market downturns.

3. Do nothing

Sometimes, the best course of action is simply to stay the course. For long-term investors, reacting to short-term market volatility can be counterproductive.

Maintaining your investment strategy and avoiding impulsive decisions helps prevent locking in losses and missing potential rebounds. Staying disciplined during market fluctuations is often the key to achieving long-term financial success.

4. Make sure your asset allocation is appropriate

A market downturn is a good moment to review your portfolio's asset allocation. Over time, certain investments may become overrepresented in your portfolio, leading to increased risk.

Rebalancing your portfolio ensures that your investment mix aligns with your risk tolerance and investment objectives.

A well-diversified portfolio can also help mitigate losses during market volatility. So, a downturn might reveal that your asset allocation is not as diversified as it should be.

5. Consider a Roth IRA conversion

Converting a traditional IRA to a Roth IRA during a market downturn can be advantageous. Since the value of your investments is likely to be lower, the tax liability on the conversion could be reduced.

Many people convert to a Roth because they want both tax-free growth and tax-free withdrawals. It's important to consult with a tax advisor to understand the implications of a conversion, however.

6. Incorporate tax-loss harvesting into your strategy

Market declines can provide opportunities to offset capital gains through tax-loss harvesting. This is a strategy where you sell underperforming assets so you can realize losses that will reduce your taxable income.

Such losses can offset current gains elsewhere in your portfolio or can be carried forward to future tax years.

Implementing this strategy requires careful planning to avoid wash-sale rules and other tax complications. So, it can be wise to consult a tax professional before taking this step.

7. Maintain perspective

It's crucial to keep a long-term perspective during market downturns. Historical data shows that markets have recovered from past declines, rewarding patient investors.

Avoiding panic and staying focused on your financial goals can help you navigate the short-term ups and downs of the market. Regularly reviewing your investment plan and consulting with financial professionals can provide reassurance during uncertain times.

Bottom line

Market downturns are challenging, but they can also offer opportunities to strengthen your financial position over the long run.

​Maintaining perspective and staying disciplined are key behaviors everyone must master before they start investing. Following the tips on this list can help you navigate market volatility and continue to build your wealth over time.​