Navigating Market Volatility During an Election Year: Six Considerations
I understand how unsettling market volatility can be—especially during an election year when emotions and uncertainty can be high. But it's important to remember that volatility is a normal part of investing. In fact, over the past 40+ years, the S&P 500 has experienced an average intra-year drop of about 14%, yet it has ended the year with positive returns 75% of the time. With that perspective in mind, here’s how you can navigate the turbulence to stay on track toward your financial goals:
1. Stay the Course
Stick to your long-term plan: While it’s tempting to react to the latest news or market movements, making impulsive changes can often do more harm than good. Historical data shows that those who stay invested during volatile periods tend to come out ahead in the long run.
2. Review Your Cash Needs
Ensure you have liquidity: Before making any investment decisions, it’s crucial to assess your short-term cash needs. Do you have enough set aside for upcoming expenses or emergencies? If you’re comfortable with your cash reserves, it allows you to avoid selling investments at a low point just to cover immediate costs. In fact, having 3 to 6 months of expenses in cash can provide peace of mind during uncertain times.
3. Consider Rebalancing Your Portfolio
Keep your portfolio on track: Volatility can cause your portfolio to drift away from its intended allocation or mixture of stocks, bonds, and cash. For example, if stocks have dropped in value, your portfolio might become more heavily weighted in bonds or other assets. Rebalancing helps you maintain your target allocation, ensuring you’re not taking on more or less risk than you intended.
4. Opportunistic Investing
Capitalize on market dips: If you have excess cash that’s not earmarked for short-term needs, market downturns can present opportunities. During periods of volatility, high-quality stocks often go on sale. By investing when others are fearful, you can potentially buy assets at a lower price, setting yourself up for gains when the market rebounds. Remember Warren Buffett’s famous advice: "Be fearful when others are greedy, and greedy when others are fearful."
5. Consider Roth Conversions
Leverage lower market values: Market downturns can also be a good time to consider a Roth IRA conversion. When the value of your investments is lower, converting them from a traditional IRA to a Roth IRA could result in a smaller tax bill. This move can be particularly beneficial if you believe those investments will appreciate over time, allowing you to benefit from tax-free growth in the future.
6. Tax-Loss Harvesting
Turn losses into tax benefits: If some of your investments have lost value, you can sell them to realize a loss, which can offset gains in other areas of your portfolio. This strategy, known as tax-loss harvesting, can help reduce your taxable income for the year. However, be mindful of the wash sale rules, which disallow the deduction of a loss if you repurchase the same or a substantially identical security within 30 days before or after the sale. To avoid triggering these rules, consider reinvesting the proceeds in different assets that still align with your overall portfolio strategy while benefiting from the tax savings.
Navigating market volatility can be challenging, but remember, you don’t have to go it alone. As fee-only advisors in Utah, we are here to help you stay focused on your long-term goals and make decisions that align with your overall financial plan. If you have any concerns or questions, feel free to reach out!
About the Author
Aaron Best, CFP®
is a fee-only financial advisor who works with individuals and families with small business planning, retirement planning, helping widows and widowers among many other services.
