The market has been unpredictable lately, leaving many investors feeling uncertain about where to place their money. While market volatility can be unsettling, it also presents unique opportunities. In this post, we’ll explore why it’s important to understand the causes of market volatility, and how you can take advantage of this environment with strategic investment planning like Roth conversions and portfolio rebalancing.
1. Market Volatility and What’s Causing It
In recent months, we’ve seen increased market swings driven by several factors:
- Inflation and interest rates: Central banks around the world, including the Federal Reserve, have been tightening monetary policies to combat inflation. These actions often lead to short-term market volatility as investors react to the changes in interest rate expectations. The United States has been in discussions with trade partners about tariffs. Tariffs historically cause inflation in the short term. As inflation rises, rates tend to follow. More expense costs to borrow, tend to lead to less spending by businesses and consumers.
- Geopolitical instability: Ongoing global events, such as political tensions, supply chain disruptions, and conflicts, have added uncertainty to the market, prompting some investors to pull back.
- Consumer confidence: Consumer confidence reflects individuals’ perceptions of the economy and their financial well-being. Recent reports indicate a decline in consumer sentiment, influenced by factors such as trade policies and inflation concerns. This decline in confidence can lead to reduced consumer spending, further straining the economy.
While these factors may cause short-term downturns, it’s important to remember that volatility is a natural part of market cycles. Investors who can ride out the storm often see long-term benefits.
2. The Benefit of Doing a Roth Conversion When the Market is Down
A Roth conversion involves transferring assets from a traditional IRA or 401(k) to a Roth IRA, and it comes with several benefits—especially when the market is down:
- Lower tax rates: When the market is down, asset values are generally lower. By converting to a Roth IRA during a downturn, you lock in a lower tax rate because your assets are worth less, and you’ll pay taxes on the current, reduced value of your portfolio.
- Future tax-free growth: Once converted, the funds in your Roth IRA will grow tax-free, and future withdrawals will not be taxed (if you meet the qualifications). This is particularly advantageous if you expect the market to rebound over time and your assets to grow.
- Strategic tax planning: Converting during a downturn can help you manage future tax liabilities by spreading out the tax burden over several years. Since you’re converting at a lower value, it can be a great way to reduce the long-term tax impact of withdrawals in retirement. Assets in a Roth IRA are not subject to RMD calculations.
3. The Benefit of Portfolio Rebalancing When the Market is Down
Portfolio rebalancing is an essential strategy to maintain your desired risk profile, and doing so during market downturns can have significant benefits:
- Buy low, sell high: When the market is down, some of your assets may have lost value. By rebalancing, you’re essentially buying those assets at a lower price. This “buy low” strategy can position you for better returns when the market recovers.
- Maintain risk tolerance: Over time, the market’s ups and downs can skew your original portfolio allocation. Rebalancing ensures that you stay aligned with your risk tolerance and investment goals, especially in volatile times when certain assets may outperform or underperform.
- Long-term strategy: Rebalancing during market downturns forces you to stick with your long-term strategy, preventing emotional decision-making that could hurt your future returns. By staying disciplined, you avoid selling during market lows and can benefit from long-term growth when the market recovers.
Conclusion:
While market volatility can be unnerving, it’s important to view these periods as opportunities to make strategic moves. Acknowledging the causes of volatility helps us understand its impact, while actions like Roth conversions and portfolio rebalancing can position us for future success. By taking a proactive approach, you can turn challenging times into opportunities for tax savings and long-term growth. Remember, volatility is often the price we pay for higher returns over time, and with the right strategy, you can emerge stronger on the other side. For help with these strategies, contact Decima Wealth Consulting today!
