What Now? An Investor’s To-Do List for Chaotic Markets

After years of thinking about and working on investing matters, I’m normally pretty blasé about market gyrations. When friends and acquaintances ask me what I think about the market, they’re often surprised when my response is, “Why, what happened?”

Periodic market downdrafts are often short-lived, and even the prolonged ones show up as tiny blips amid a generally upward march. To paraphrase a quote about something much more important, the arc of the market is long, but it bends toward going up. Laziness can be a superpower for investors.

But there I was on Wednesday night, glued to my phone, watching market futures and scrolling through dire predictions about tariff implications for the economy and stocks. And there I was on Thursday morning, tuning into CNBC to see just how bad the market’s reaction to the tariffs would be.

If Thursday is any guide, it hasn’t been great. US stocks had lost about 4% for the year to date before Wednesday’s tariff announcement, and by Thursday morning, they had dropped another 4%-plus. US small caps, which are generally more responsive to economic conditions for better and for worse, had dropped about 6%.

Investors attempting to make sense of the news may wonder if there’s anything they should be doing in response to the chaos. Here are some thoughts on how to proceed, moving from most important steps to those in the category of “nice to do.”

First, Do No Harm

First, what not to do: Dramatic market losses can spark real emotions (anxiety, powerlessness), and it can be tempting to take dramatic portfolio measures in response. With cash yields decent relative to recent history, the stability of money market funds or CDs might look like a tempting and reasonably profitable way to escape the cacophony of the market. You do need some liquid reserves in your portfolio (more on this in a minute), but resist the urge to shift out of stocks entirely. Such a move could buy you some short-term relief, but it will soon be replaced by another nagging worry: Is it time to get back in?

Moreover, retreating to cash only protects you from one risk—further equity losses—but it doesn’t safeguard you against other key trouble spots—specifically, inflation risk or the chance that you’ll outlive your money because your portfolio didn’t grow as much as it needed to. A better plan is to maintain a stock/bond mix that makes sense relative to your goals, life stage, and proximity to needing your money, then rebalance back to your targets periodically. A balanced asset allocation will make sense for most people approaching or in retirement, whereas a more equity-heavy mix will suit investors under 50.

Check Liquid/Safe Reserves

In addition to that long-term buy-and-hold portfolio, every investor needs to hold liquid reserves on an ongoing basis. Market volatility and uncertain economic conditions can be a good reason to see what you’ve got.

If you’re still working, you need an emergency fund to protect you against unexpected expenses or income disruption; that’s particularly important with recession worries on the front burner. Three to six months’ worth of living expenses is a good target for liquid reserves, but sole earners with dependents and/or older adults with high salaries should reach for more, like a year’s worth of liquidity.

Retirees, meanwhile, should target one to two years’ worth of anticipated portfolio withdrawals in cash reserves to provide them with cash flows if their stocks or bonds are in a trough (see: 2022), and another five to eight years’ worth of anticipated portfolio withdrawals in high-quality bonds in case stocks flatline or worse for a sustained period (see: 2000-09 in the US). It’s never ideal to sell into weakness, but for people who are in retirement or close to it, I’d argue that it’s not too late to derisk.

Assess Inflation Protection

Holding a component of safer assets will protect against sustained equity-market downdrafts and personal risk factors such as job loss, but such investments are vulnerable to inflation because it gobbles up purchasing power from any interest that you’re able to earn. Inflation was already top of mind thanks to the recent bout of higher prices, and it’s a significant concern again in that tariffs have the potential to be inflationary.

For retirees, checking inflation protection is particularly important for a few reasons. First, more of their portfolios are apt to be staked in cash and bonds with income but little to no growth potential; higher prices eat away at the interest they pay out. Second, while Social Security helps make retirees whole with respect to higher prices, the portion of their “paychecks” they’re withdrawing from their portfolios isn’t inherently inflation-adjusted. That’s why it’s important to build in a bulwark of inflation-protected assets into the safe portion of their portfolios, either a full-on Treasury Inflation-Protected Securities ladder or a complement of TIPS mutual funds/exchange-traded funds and I-bonds

People who are still working and not yet drawing from their portfolios have less reason to worry about inflation because they typically have two built-in defenses against it: periodic cost-of-living adjustments in their salaries and ample exposure to stocks in their portfolios. Stocks have outearned inflation by a decent margin in many economic environments, though they’ll tend to be less reliable in a weak growth/high-inflation period.

Scout Around for Tax-Saving Opportunities

Finally, one of the few benefits of market downdrafts is the opportunity to improve your tax position. Most investors have two key tools in their toolkits to do so.

To the extent that you have taxable accounts, you may be able to sell securities at a loss; you can then apply those losses to offset capital gains elsewhere in your portfolio or up to $3,000 in income. (Unused losses can be carried forward indefinitely.) You can even buy a similar—but not substantially identical—security to maintain consistent economic exposure; for example, you could sell recently purchased shares of Nvidia NVDA and buy a US large-growth index ETF instead. If you want to rebuy the same security you’ve just sold, you’ll need to wait more than 30 days for the loss to count.

Converting traditional IRAs to Roth IRAs is also worth considering in times of market turmoil. You’ll still owe taxes when you convert, but depressed IRA balances mean that you can convert more of your account with the same tax impact as when stocks were riding high. Just be sure to get some tax advice before proceeding with conversions; it rarely makes sense to convert a whole traditional IRA balance in a single year because of some of the knock-on tax effects.