Turn Market Lemons Into Lemonade
Paul K. Fain, III, CFP®
It was one of my father’s favorite adages: “Turn a lemon into lemonade.” When markets turn sour, most investors feel the sting. But here is a perspective shift: Downturns do not have to be disasters – they can be opportunities in disguise.
There are several ways to turn these unhappy events to your advantage. For example, you can gift assets to your children and let the assets recover in value in the hands of people with a lower tax rate.
You can move assets out of a traditional IRA into a Roth IRA and be taxed on the lower valuation of the assets. When the downturn ends, the assets will (hopefully) grow free of all future taxation, meaning lower taxes today could represent a bargain in the future. And if/when a Roth account passes to heirs, they will be able to take the money out tax-free.
If you are holding investments in a taxable account, you might be able to turn paper losses into real tax savings. Selling investments at a loss can offset gains elsewhere, potentially reducing your tax bill. The key is to avoid the wash-sale rule, which disallows the deduction if you buy the same investment back within 30 days. If you want to keep participating in the market, you must buy a different security – although it could be like the one you sold. Work with a tax advisor to ensure you are doing it right.
Downturns are a sale on stocks. Imagine your favorite store offering a 20% discount. You would stock up, right? (pun intended). The stock market works similarly. When share prices drop, high-quality companies often become undervalued. For long-term investors, this is the chance to buy great businesses at a discount. Warren Buffett said it best: “Be fearful when others are greedy, and greedy when others are fearful.”
Rebalance to realign. If you have a diversified portfolio, a downturn may throw off your asset allocation. Stocks might shrink as a portion of your portfolio while bonds grow. This is an opportunity to rebalance – sell some of the assets that held their value and buy more of the ones that dropped (but still have strong fundamentals). You are not just investing – you are buying low and selling high.
Check your emotions, not just your portfolio. A downturn is a test of your temperament. If you are losing sleep or feel the urge to “do something,” it might be time to revisit your risk tolerance. Investing is emotional, but long-term success often requires short-term discipline. The worst decisions tend to happen when fear takes the wheel.
Time, not timing. Trying to predict the market bottom is a fool’s errand. Unfortunately, nobody knows the date, time, or level in advance. But historically, the market has recovered from every downturn – and has gone on to reach new highs. Staying invested, staying diversified, and staying calm are the real keys to turning market lemons into long-term lemonade.
This article originally appeared in the Knoxville News Sentinel online on April 18, 2025.
