WSJ Your Money Briefing - Money Moves to Make When the Stock Market Drops

Episode Date: August 7, 2024

Financial advisers generally recommend that individual investors avoid knee-jerk reactions when stock-markets drop. Wall Street Journal personal-finance reporter Joe Pinsker joins host J.R. Whalen to discuss exceptions to that rule.  Sign up for the WSJ's free Markets A.M. newsletter. Learn more about your ad choices. Visit megaphone.fm/adchoices

Your teen requested a ride, but this time, not from you. It's through their UberTeen account. It's an Uber account that allows your teen to request a ride under your supervision with live trip tracking and highly rated drivers. Add your teen to your Uber account today. Here's your money briefing for Wednesday, August 7th. I'm J.R. Whalen for The Wall Street Journal. Here's your Money Briefing for Wednesday, August 7th. I'm J.R. Whelan for The Wall Street Journal.

Watching the Dow Jones Industrial Average lose 1,600 points Friday and Monday caused many individual investors to hit the sell button or make significant changes to their portfolio. It's better to make a plan in advance for times like this than to rapidly and frantically try to adjust course in the moment. The financial plans that we set up in calmer times, those are likely going to be wiser than any rash decisions that we make in anxious moments. But there are exceptions to the rule.

We'll talk to personal finance reporter Joe Pinsker about that after the break. DQ presents... Picture this. Picture the Reese's Extreme Blizzard back for a limited time. Reese's peanut butter cups and Reese's Pieces blended together with world-famous soft serve in one Blizzard treat. It's a dream treat for Choco Peanut Butter lovers. Wait, are you dreaming? Well, check. Are there any dinosaurs around? Are you riding a unicorn? Are you back in high school? No? Then, oh yeah, this Reese's Extreme Blizzard is real. Hurry into DQ today. DQ. Happy tastes good. With all the stock market volatility over the past week, individual investors have the urge to sell, despite what many financial advisors recommend.

Wall Street Journal personal finance reporter Joe Pinsker joins me. Joe, why is the advice to not sell after a series of declines so unsatisfying to some people? When something bad happens in the world, we like to do something. We like to feel like we have some sort of agency and some control. And a lot of people see bad news and feel compelled to take action. Personally, I've always actually kind of found the advice to do nothing a little bit liberating because messing with my portfolio is one thing I can take off my to-do list, one thing fewer I have to worry about, but maybe that's just me. And if you've got a financial advisor, it's like someone else making the decision for you. There you go. Even better.

What is it about people's portfolios that leads many advisors to say, just sit tight? The idea here is that it's better to make a plan in advance for times like this than to rapidly and frantically try to adjust course in the moment. The financial plans that we set up in calmer times, whether we're the ones doing it or with the help of a financial advisor, those are likely going to be wiser than any rash decisions that we make in anxious moments. And I'd say that if there is a silver lining to a big drop in stock prices, maybe it's that this is the jolt that some people need to make a plan for next time. That feeling of anxiety and lack of preparedness right now, maybe that's the inspiration that has people set up a plan to be less stressed next time something like this happens. But in the story that you and the personal finance team wrote, you say that there are some moves that people could consider. Let's start with an opportunity to lower your tax bill.

How would stocks work into that? One thing people might think about at a moment when stock prices have gone down is a strategy called tax loss harvesting. The idea is that if you sell a stock at a lower price than you bought it for, that's bad. But you can, if you sell it, record it as a loss for tax purposes, and you can apply that loss against other investment gains. So to put this in basic terms, if you had a $1,000 loss on one stock and a $1,000 gain on another, those would cancel each other out and you wouldn't owe taxes on the gain. As I said, we aren't exactly rooting for losses in our portfolio, but if there are underperforming stocks that you hold and that you've been meaning to sell, a moment when stock

prices are down could give you a bit of a tax benefit. How would a sell-off factor into moves people might want to make with their retirement accounts? This is where something called a Roth conversion enters the picture. The idea is that when you turn a traditional retirement account into a Roth IRA or a Roth 401k, doing that means that you have to pay some taxes. The benefit of a Roth account is that you are spared from having to pay taxes on future investment gains. But when making this switch from a traditional account to a Roth, there can be sometimes a big tax bill because you are taxed on the money of the pre-tax account at your current income tax rate. So basically, when stock prices are down, doing a Roth conversion becomes more affordable. If you had a portfolio that was worth $50,000 on Friday, and let's just say hypothetically, it's worth something like $45,000 on Monday, converting that account to a Roth actually is going to come with a smaller tax bill because the value of the account is smaller. While some might want to hit the sell button during market downturns, others might be ready to buy. Individual investors have two and

a half trillion dollars sitting on the sidelines in money market accounts. If they feel like this is a buying opportunity, what moves do financial professionals suggest they could make? Advisors' starting point for thinking about this usually is to say that you should assess your finances and see if there's money that you don't expect to need for some number of years. Anytime that you're putting money into the market, they say it's good to not need it right away. And so what people could do at this point is if there's money that they have in a money market account or a high yield savings account that they've been maybe taking advantage of high interest rates lately, they might be able to deploy that money into a longer term investment and a drop in stock prices could be a moment to do that. Similarly, something that investors can do at this moment is take a peek at their

retirement accounts. A lot of people have cash sitting in their 401ks that's just uninvested. And what you could do is use this as a nudge moment to put that into the market now or into bonds so that you don't miss out on longer run returns. And for both of those strategies, there is a risk of what one financial advisor I was in touch with called buyer's remorse, where you put money into the market and then all of a sudden it goes down a couple of days later. If you want to avoid those feelings of regret, what you could do is instead of putting a big chunk of money into an investment all at once, you can do it incrementally, maybe 10% of it each week for 10 weeks. And that way you aren't following so much

what happens in the days after your investment. That's WSJ reporter Joe Pinsker. And that's it for your Money Briefing. This episode was produced by Zoe Kalkin with supervising producer Melanie Roy. I'm J.R. Whelan for The Wall Street Journal. Thanks for listening.