By Dr. Jim Dahle, WCI FounderAs I write this in March 2025, the US stock market has been diving. It does that every now and then, just like other investments. I'm often surprised by how hard that is on people, though. All of a sudden, the forums and my email box become full of questions about what to do about it. Well, it's part of your job as a long-term investor to lose money from time to time. That doesn't necessarily make it easy, though. Here are some tips that might help.
10 Ways to Feel Better About Losing Money
It sucks to lose money, but you don't have to feel badly about it if you remember these tips.
#1 Consider the Clarity of Your Crystal Ball
Part of the reason why it hurts to lose money is that you feel dumb. You feel like if you had paid more attention or paid an advisor that you could have somehow avoided being in the market when it went down. Well, guess what? Your crystal ball is cloudy. Don't feel bad. Mine is, too. And so is everyone else's. The Market Timer's Hall of Fame is an empty room. If you think you can predict the market, start journaling your predictions. Be specific. Within a year or two, you'll likely convince yourself that your crystal ball is cloudy, too.
More information here:
Your Crystal Ball Predictions for 2025
#2 You Don't Lose Until You Sell
You can tell yourself lies, too. This lie is quite popular and one of my favorites. Your house, like your stocks, goes up or down in value each and every day. You just don't realize it because nobody marks it to market. However, the liquidity of the stock market provides daily (and minute-by-minute) pricing on your publicly traded investments. So, you realize it when you're losing money, and it can be emotionally painful.
But you don't have to sell your stocks every day. You can own them for years before you sell. Go ahead and tell yourself that you don't lose money on your house or on your stocks until you sell them. It's not actually true; you really did lose some wealth when the market dropped today or yesterday. But it just doesn't matter all that much, so tell yourself whatever you need to feel better.
Another favorite lie is “stocks are on sale.” There's actually some truth to that. We all get excited when gasoline, food, and Broadway tickets go down in price, but for some reason, we get bummed when stocks become cheaper to purchase. But stocks went down in price for a reason—the market as a whole thinks they're less valuable than they were a few days ago. You might think the market is wrong, but the market is usually right more than the individual investor.
#3 Think Long Term
Remember your timeline. You didn't (I hope) invest money in the stock market that you need any time soon. You won't be spending this money for 10-60+ years. Who cares if it goes down in value this year, much less this week? You shouldn't. All you should care about is that it was a profitable investment from the time you owned it until the time you sold it. The truth is that you're never actually going to sell a whole bunch of your early investments anyway, at least in a taxable account. You'll be spending dividends and interest, and if you have to sell some shares, they'll probably be the high-basis shares you bought in the last few years before retirement.
#4 Tax-Loss Harvesting
Another great way to make lemonade out of lemons, at least in a taxable account, is to tax-loss harvest. You trade one investment with a capital loss for a similar but not “substantially identical” investment. You stay in the market to benefit from the almost inevitable recovery in stock prices while booking a loss you can use on your taxes. You can use $3,000 a year against ordinary income and an unlimited amount against capital gains each year. If you combine this technique with using appreciated shares (owned for at least a year) for charitable donations, it can be particularly powerful.
#5 You're Buying More Shares
Whether you are periodically investing like most who earn money every month and then put it in the market—or dollar cost averaging a lump sum of money—you get more shares for your money when the share price goes down. If your monthly contribution bought 100 shares last month, you can be thrilled that you bought 113 shares this month with the same amount of money.
More information here:
Staying the Course Despite the Trump Tariffs
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#6 Expected Future Returns Are Higher
Another cool thing about investments is that the lower the price you pay for them, the higher your expected future return. If bonds drop in price because interest rates go up, guess what? That bond now has a higher yield and a higher future expected return. Stocks work the same way. Now, you can buy a dollar of earnings from that company for $15 instead of $18. That's a win.
Real estate is similar. Prices go down, cap rates go up, and future appreciation becomes more likely. Trees don't grow to the sky. There is a natural canopy height for a forest. There's a lot more room for a 10-foot tree to grow before reaching that canopy than a 100-foot tree.
#7 Rebalance
Some people just need something to do when the market goes way down. A good written investing plan includes a provision telling you when and how to rebalance your portfolio back to its original percentages. If you feel like you need to do something, maybe check and see if it's time to rebalance. This generally forces investors to sell high and buy low, typically a good thing in the long run.
#8 Be Happy About Your Diversification
When the market dropped in early 2025, not all of my investments went down in value. Some zigged while others zagged. This is the benefit of diversification. US stocks were down, but international stocks, real estate, and bonds all went up in value. Celebrate your winners and try to forget about your losers. You know you have a diversified portfolio when you are always upset with something you own.
More information here:
Don’t Abandon Your Diversification
#9 Consider Whether Your Asset Allocation/Risk Tolerance Was Right
Risk tolerance is revealed in bear markets. You thought you could handle a 100% stock portfolio, but now you're losing sleep at night. You just learned an important lesson. While I would rather NOT see you adjust your asset allocation in the middle of a nasty bear market, you probably should after the recovery. If you must do so now, try to only sell down to the sleeping point. Better to capitulate with 10% of your portfolio than 100% of it.
#10 Get Rid of Legacy Holdings
Some of us own investments in our taxable accounts that we would rather not own anymore, but we don't sell them because of the capital gains tax implications. These are legacy investments. Guess what? In a nasty bear market, those capital gains tax implications are decreased, and they may go away completely. That's a great time to get rid of your legacy holdings. It can be a great time to do a Roth conversion, too.
It's not fun to watch money that you used to own disappear. Stay the course and try to console yourself by thinking differently or at least find some productive portfolio tasks to do instead of selling low.
What do you think? How do you survive bear markets? Which of these techniques do you use?
#2- you don’t lose until you sell: If you have longstanding holdings maybe you just don’t have as big a gain as you might have had by selling last week or year or next week or year.
In retirement I had delayed balancing my portfolio to the new, lower stock percentage based on our age so I needed to convince myself to take the prescribed action at least gradually to avoid HAVING to sell (a lot of) stocks in a bad market. Luckily given current markets I overcame my reluctance by considering the following: (In 2024 not now!) Yes, on this day/ this week my mutual fund price is down somewhat from yesterday/ last month. But most of it was bought in 2000 through 2020 (stopped reinvesting dividends around then) and even compared to 2020 it is UP! So I’m definitely not losing when I sell, only possibly missing out on future higher growth compared to the bonds or CDs I am moving that money into.
In fact today’s markets have me thinking I should move money back INTO stocks that I had sold in the last few years to rebalance. Given my age, pessimism, and planned next 5-10 years spending I am resisting that urge firmly. (And will definitely have an even harder time adjusting my balance if I spend more and/or the feared recession lingers.)
BTW when we apply #2 to selling your house- be sure to calculate rental savings. Even where we lived only 4 years and made back a bit less than purchase price after realtor fees etc. I got to live on my dream 6 acre farmette for less than $2000 a month not counting (hobby) money lost planting crops and keeping livestock. Of course if we’d rented an apartment for $800 we’d have been way ahead but I’d have been pretty unhappy. My 32 year old is still saying “I want chickens for my 3 year old like we had when I was this age!” It cost us even less ‘rent’ to just “break even” including all the renos and repairs selling the last place but having been there 16 years.
Does tax loss harvesting only work for shares held longer than a year (capital gains) , or does it have the same effect for short term holdings (ordinary income)?
Don’t wait a year to grab a loss. But do wait a year to sell something with a gain. ST losses are even more useful than LT losses.
Can you elaborate on the ST loss part of this comment?
Not sure what else to say. Work your way through Schedule D and you’ll see how losses get used. Short losses against short gains, long losses against long gains, then any left over short losses against long gains and then up to $3,000 in losses against ordinary income and the rest carried over to the next year.
+1 on #10. As a matter of fact, I’d separate the two things you mentioned there and give each their own category.
– ROTH Conversions – when the market is down, it’s a great time to do a ROTH conversion because you get more bang for your ROTH conversion buck. Unlike TLH, you actually gain without needing to recognize any loss at all when you convert during during a down market. I just did some when the market got to 10% down; wish I’d waited a bit longer, but it’s still a savings. If conversions are part of your long term plan, you should have in your investment policy a statement about conversion timing with market drops at specified levels.
– Legacy holdings – this is a tricky one. I have a position in old company stock that turned into a 40 bagger (4000% increase!). It’s turned into this ungainly long-term gain and an overweighting in one equity position that has been fun to watch – and nerve wracking at the same time. I had a sell trigger in place in my investment policy for this position based on a percentage drop. I initially ignored it until the company issued a statement about their long-term earnings dropping for the next several years. The timing was horrible, nearly coinciding with the tariff announcement that set off this latest correction creating a double whammy on this position’s value. So I took a deep breath, reminded myself that most of a big gain is still a big gain and would cover the tax bill, and sold off a big chunk of it. I’m still patting myself on the back for my genius timing, as this one continued to drop another 25% in the wake of the market turmoil. It’s come back a bit in the last couple days, but still way lower than when I sold.
Oddly, I’m cheering for a further drop, even though I still have a significant position left in it! Behavioral finance is crazy stuff.
Yes, IF a Roth conversion is a good idea for you, it’s an even better idea while markets are down.
You’re right that a market drop may only make dumping a legacy holding a slightly better idea. Here are other ways to deal with them:
https://www.whitecoatinvestor.com/legacy-holdings-in-taxable/
My IPS includes tax loss harvesting at -20% (bear market) and every 10% drop from my 52-week high. The Monday after “D-Day,” I sold some FSKAX (US Total Market Index) and bought FXAIX (Large Cap US Index) to avoid wash sale rules. I’m grateful to this blog for teaching me about this strategy!
Our pleasure. Whether you need a 10% or 20% drop in the market to tax loss harvest varies a lot. You really just have to look at the size of the loss and ask yourself if a loss of that size is relevant to your finances.I grabbed a $150,000 loss a week ago or so but I wouldn’t bother to pick up another $1500 one.
Related to some of these but I would say “zoom out” and don’t truncate any graph you might look at. I currently use empower to track accounts, previously used quicken. When it goes to the default setting of 90 day history, things can look “bad.” Zooming out to 3 years ago when I starting using empower and 24 years ago when I started using quicken, I can’t even notice the market “blips.” Even less so if I were seeing it on a graph where the y axis is zero (ie quicken). Employer almost looks like a straight line. Quicken has a nice exponential growth. (Really like to see that go from -200k to where we are now)
Great tip.
The way I dealt with downturns was to ignore them. I had convinced myself that I had a good asset allocation, and good quality investments. This was well before I learned of WCI and the great advice available.
I was so busy and so stressed with practicing medicine ( family practice) in a corporate practice, that it was very easy to ignore close watch on my finances. I knew I would not likely sell anything at a loss, so why bother watching? As it turns out this autopilot mentality brought me right into a safe harbor and now I am doing very well in retirement.
I don’t think I was being totally ignorant, I just convinced myself I didn’t need to watch anything very closely until I really needed a big chunk of money, which was rare. I have never lost a night’s sleep over finances in a downturn.
Now losing sleep over the BS at work, that’s a different matter…
A lot of wisdom there.