What to Do When the Market Drops: Bear Market Action Plan

It’s never easy to watch the market decline. While we know intellectually that staying disciplined is the right move, removing emotion from financial decisions is hard—especially when there’s always a real and unsettling reason behind the drop. Whether it’s a pandemic, financial panic, or global instability, downturns never feel like just numbers on a screen; they come with headlines that make it tempting to act. The highly charged 24/7 media cycle that follows you everywhere in your pocket doesn’t help either.

But history has shown that staying strategic, not emotional, leads to better long-term results. Still, there are things you can do to take advantage of market downturns instead of reacting emotionally.

Here’s a simple action plan based on how much the market has declined:

📉 Market Down 5%: Do Nothing

✅ Stay the Course – A 5% drop is common and not a cause for action. Market fluctuations are normal, and reacting too soon can do more harm than good.

📉📉 Market Down 10%: Take Tactical Steps

✅ Rebalance – If your portfolio has drifted from your target mix, now is a good time to restore balance. Rebalancing results in buying assets that are down (stocks) and reducing assets that are either up or not down as much (typically bonds).
✅ Partial Roth Conversions – Converting some traditional IRA funds to a Roth IRA at lower values can reduce future tax burdens. If you were already planning to do Roth conversions of a certain amount within the year, go ahead and convert half of your planed amount. This leaves room for surprises or to do more Roth conversions if the markets continue to slide.

Roth conversions are taxable. Consult your financial advisor or tax professional regarding the tax consequences of Roth conversions, which are recognized as ordinary income in the year you make them.

✅ Tax-Loss Harvesting – Selling positions at a loss in taxable accounts can offset future gains and reduce taxes. Reinvest those funds immediately in a similar (but not too similar) holding so that you stay invested.

IMPORTANT NOTE ON WASH SALES: The substitute security that you purchase as a replacement cannot be “substantially similar” to the one you sold, otherwise you will trigger a wash sale. For example, if you sold an S&P500 ETF or mutual fund, consider buying a total stock market index as it’s replacement. If you purchase another S&P500 ETF, even from a different fund manager it’s technically a wash sale, and you could not recognize the loss.

📉📉📉 Market Down 20%: Get More Strategic

✅ Rebalance Again – Market declines can push your portfolio off track. Rebalancing keeps it aligned with your goals. Plus you’ll be buying low and selling high.
✅ Increase Stock Allocation (If Applicable) – If your risk tolerance and situation allow, consider shifting more into stocks while prices are lower.
✅ Expedite Roth Conversions – A deeper market decline means even better opportunities for tax-efficient Roth conversions. When the market recovers, that recovery will occur within your Roth account, where all those gains are tax-free!
✅ Tax-Loss Harvesting – Continue harvesting losses to optimize your tax situation.

📉📉📉📉 Market Down 30%: Take Advantage of Opportunities

✅ Rebalance Again – Ensuring your portfolio remains aligned with your long-term plan is critical.
✅ Increase Equity Allocation (If Applicable) – If you have the flexibility, adding to stocks at depressed prices can boost long-term returns.
✅ Consider a Larger Roth Conversion (Even in a Higher Tax Bracket) – Paying taxes on conversion now, even at a slightly higher rate, could mean more tax-free growth when markets recover. Again, consult your financial and tax advisor regarding how large a Roth conversion makes sense, especially if you will be crossing into a higher bracket.
✅ Tax-Loss Harvesting – If you haven’t maxed out opportunities, continue capturing losses for future tax benefits.

The key to navigating market downturns is being proactive, not reactive. If your plan is sound, these declines are opportunities—not disasters. Stick to the strategy, and history suggests the recovery will take care of itself.