How a Financial Advisor Can Help During Market Volatility
Markets & EconomyArticle provided by Focus Partners
Reading headlines about huge swings in the financial markets can be stressful for even the most seasoned investors. It’s natural to feel uneasy watching portfolio values fluctuate, but moments like these also present opportunities. In our view, volatility can become a tool rather than a threat.
During times like these, a financial advisor can be a powerful partner. Instead of reacting emotionally, an advisor helps you respond strategically, keeping your long-term goals on track while making the most of current conditions. Here’s how a financial advisor can provide support, clarity, and opportunity during periods of heightened market volatility.
Making Smart Moves Within Your Portfolio
When markets become turbulent, there are several actions that can help you strengthen your investment strategy.
- Tax-loss harvesting: A financial advisor can help identify investments in your portfolio that have declined in value and strategically sell them to realize a loss. These losses can offset gains elsewhere or even reduce your taxable income. It’s a way to potentially turn short-term pain into long-term gain.
- Rebalancing: Market swings often cause your portfolio to drift from its original target allocation. Rebalancing helps restore balance by selling assets that have increased in value and buying those that have declined—essentially “buying low and selling high.”
- Reviewing asset location: Not all investment accounts are taxed the same. An advisor can reassess where different investments are held—whether in taxable accounts or tax-deferred ones—to help improve tax efficiency. This can lead to significant savings over time.
Opportunities Inside Retirement and Tax-Advantaged Accounts
Volatile markets can open the door to actions that are generally advantageous inside retirement accounts and other tax-favored vehicles.
- Roth conversions: If you’ve already considered converting a traditional IRA or 401(k) into a Roth IRA, a market downturn could be the right time. The assets you convert are taxed at their current value, so converting when values are lower means a smaller tax bill—and any recovery will happen inside the Roth, tax-free.
- Accelerating 401(k) contributions: If you’re financially able, contributing more to your 401(k) earlier in the year during a market dip allows you to buy more shares at lower prices. It’s one way to potentially benefit from a market rebound.
- Backdoor Roth, IRA, HSA, or 529 contributions: If you’re planning to contribute to a tax-advantaged account, consider doing it during a market drop. Your contributions could grow more quickly when markets recover.
- Resetting NUA cost basis: If you hold employer stock in a retirement plan and its value has fallen below the price you originally paid, there might be a chance to “reset” the cost basis. This could increase the potential tax benefit from net unrealized appreciation (NUA) in the future.
Thinking Beyond the Portfolio
Financial planning is about more than just investments. Here are a few lesser-known strategies your advisor might explore during market downturns:
- Gifting depreciated assets: If you’re already planning to make a financial gift—whether to family or to a charitable organization—consider gifting investments that have dropped in value. The recipient can hold onto the assets and benefit from any future growth, potentially outside your taxable estate.
- Accelerating dollar-cost averaging buys: If you’re gradually investing cash into the market over time (a strategy known as dollar-cost averaging), a temporary dip might be a good time to accelerate those purchases. Your advisor can help you evaluate whether this makes sense based on your situation.
Revisiting the Big Picture
A market downturn can also be a great time to check in on your overall financial plan. Emotions tend to run high when portfolios are down, but we believe that’s exactly when it’s most important to focus on the long term.
- Update your long-term projections: Markets change, and so does your financial life. A financial advisor can help you refresh your plan and make sure it still aligns with your goals. Sometimes, small adjustments today can make a big difference tomorrow.
- Evaluate withdrawal strategies: If you’re in retirement or drawing income from your portfolio, an advisor can help you assess how sustainable your current withdrawals are during a downturn. They might recommend temporary adjustments to reduce the impact on your future finances.
Final Thoughts
Volatility is part of investing, but it doesn’t have to derail your progress. With a thoughtful approach and the guidance of a trusted financial advisor, these challenging periods can present opportunities to improve your tax situation, optimize your investment strategy, and reinforce the foundation of your long-term financial plan.
Rather than going it alone, consider reaching out to a financial advisor when markets become unpredictable. Their insight, experience, and strategic perspective can help you make decisions with confidence—not just in spite of market volatility, but because of it.