Actions Advisors and Investors Can Take During a Volatile Market

The greatest growth is often realized from the greatest challenges — some of them quite painful. A personal trainer doesn’t build muscle mass by kicking back comfortably in front of the TV with their feet up, drink in hand. So it goes for anything in life — sometimes on the path toward gains, things may get tough.

With market volatility often making headlines these days, investors might be wondering what could be their best course of action: how can they actually grow their wealth amid such turmoil? While investors are generally wise to avoid major knee-jerk reactions like selling all their stocks, some use the market downturn to retool their strategies and investments and set themselves up for sturdier times ahead.

How Can Investors Use a Volatile Market to Their Advantage?

One major theme stands out among all the options below: trying to minimize the impact of tax responsibility and/or risk. A market contraction presents an opportunity for investors to rearrange assets and get in while the tax burden or risk may be lower than it can be in times of market growth.

Convert (or Partially Convert) to a Roth IRA

If a client has a traditional IRA set up, they may want to consider converting it to a Roth IRA while the market is down. Using a volatile market to make this financial move could offer a way to give clients’ retirement savings a unique boost, paying taxes on a lower balance while potentially putting them in a better spot when retirement arrives.

Unlike traditional IRAs, qualified distributions from Roth IRAs are not taxable.1 In a volatile market, a client’s traditional IRA may be down in value, so the idea here is to pay upfront taxes on the lower amount and position for tax-free growth, rather than wait it out and risk paying higher taxes on a larger amount in stable times.2

Clients should be made aware that if they make this move, they’ll need to be prepared for the tax liability and any possible upfront levies on the distribution, as well as other potential financial implications, such as domino effects from a possible increase in adjusted gross income.2

Make Prior-Year and Current Year IRA Contributions

Each year, clients have until the tax deadline to make contributions to their IRA accounts for the previous year. Deductible contributions can reduce the taxable income on the prior year’s return and thus allow for more progress on their retirement goals.3

Making these contributions while the market is down could have the potential to help increase clients’ gains once the markets pick up again. Consider making last years' contribution if the market drops early in the new year AND the contribution for the current year early while you can buy low.

Rebalance Taxable Accounts

With market values on the low side, rebalancing taxable accounts while capital gains are minimized (to easily offset with capital losses) is another possible strategy for minimizing financial impact. 

Some accounts your clients may have are taxable, while others are deferred or exempt, so have a conversation with them and look at their portfolio to see if this could be a smart strategy.

Start a Dollar-Cost Averaging Investment Plan

Having clients start with a set amount of money they’d like to invest and dividing that among various stocks might be a good approach to investing in the market at a potentially lower risk than what an investor might incur by doing the opposite — focusing on one or two stocks.

By flipping the thinking and focusing on what to spend on the stocks as opposed to which stocks to invest in, an investor could set themselves up for a successful gain over the long haul, even amid volatility. Individual stocks may be tough to predict in such tumultuous times, so diversifying may help shift some of the risk. And early gains should the market bounce off recent lows can motivate reluctant investors and help a new systematic investment plan stick.

Introduce Risk Control

Growth rarely happens without pushing outside the comfort zone. That goes for investing in stocks, too. If an investor sees nothing but blue skies and puffy clouds in their investment journey, they won’t know what to do when those clouds darken and the skies open up to unleash a storm.

You can talk to your clients whose accounts are exposed to market risk, and offer some wisdom and guidance to help weather the storm, even while that storm is happening. True risk tolerance isn’t fully understood until investors experience a bear market!

Addressing Behavioral Factors in Financial Decisions

Emotions can run high during volatile market periods, so it’s important to understand how to address them when talking finances with your clients. In a stressful and unpredictable atmosphere, they may sometimes act on impulse or make hurried decisions without thinking everything through.

You know the world of financial planning isn’t just made up of numbers and statistics. Real people with real emotions need guidance, so we’ve put together useful resources to assist you in talking with your clients. Click below to learn more about our Behavioral Finance Advice program today.



Written by: Marshall Heitzman, CFP®, ChFC, FLMI, CPCU, BFA™

Marshall is a VP - Advanced Planning Consultant with CUNA Mutual Group and has more than 25 years of experience in the insurance and financial services industry. He consults Financial Advisors on advanced retirement planning concepts for retirement and wealth management clients.

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