Using Market Volatility to Your Advantage: 5 Key Strategies for Building Wealth in Turbulent Times

In this article, we’ll explore five strategies that can help you use market volatility to your advantage and continue to pursue your financial goals, even in turbulent times.

Enduring the ups and downs of the market isn’t easy. Indeed, watching your portfolio fluctuate in value can evoke a sense of anxiety in even the most seasoned investors.

However, before your anxiety turns into panic, it’s important to remember that volatility is normal and to be expected when investing in riskier assets like stocks. It’s simply the price you pay for the opportunity to earn a higher return over time.

Plus, volatility can be a powerful ally if you know how to make it work for you. In fact, volatile market environments are where many successful investors make their money.

As Warren Buffett famously wrote in his 1986 letter to Berkshire Hathaway shareholders, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” By using market volatility to your advantage, you, too, can be in a better position to achieve your financial goals once the dust settles.

Volatility Isn’t the Enemy

Market volatility refers to the rate at which the price of an asset increases or decreases over time. When volatility is high, asset prices can fluctuate significantly over a short period. Meanwhile, prices remain relatively steady when volatility is low.

Although volatility works in both directions, investors tend to focus on the downside of volatility. As a result, many investors prefer to wait on the sidelines when markets are volatile, cashing out of their investments until things settle. Unfortunately, this approach often does more harm than good.

Indeed, successful market-timing requires investors to exit and re-enter the market at exactly the right times (a nearly impossible feat). While skittish investors may avoid short-term losses, the long-term cost of missing the ensuing recovery tends to be much higher.

Consider the following example, based on data from Putnam Investments:

Suppose you invested $10,000 in a low-cost S&P 500 index fund on December 31, 2007. From January 1, 2008, through December 31, 2022, the S&P 500 generated an annualized total return of 8.81%.

If you stayed invested the entire 15-year period, you’d have approximately $35,461 at the end of 2022, assuming you reinvested all dividends. However, if you attempted to time the market and subsequently missed the market’s 10 best trading days, you’d end the same period with $16,246—a difference of $19,215.

Thus, while volatility can be difficult to stomach, it’s not the enemy. In most cases, investors fall short of their financial goals because fear (and in some cases, greed) keeps them from staying the course.

Fortunately, a sound financial plan can help you avoid these mistakes. With the right strategies and guidance, you can use market volatility to your advantage and stay on track toward financial independence.

Here are 5 strategies that can help you use market volatility to your advantage:

#1: Dollar-Cost Averaging

Dollar-cost averaging (DCA) simply means you invest a set amount of money at regular intervals, regardless of share price. When prices are low, you’ll be able to buy more shares, and when prices are high, you’ll buy fewer shares.

This strategy works because stock prices tend to rise over longer periods, even though they may fluctuate in the meantime. Rather than attempting to time the market, a DCA approach helps use market volatility to your advantage, potentially lowering your overall cost basis over time.

More importantly, dollar-cost averaging can help you stick to your investment plan regardless of which direction the market is moving. This can be a valuable benefit, especially if you tend to let your emotions drive your investment decisions.

#2: Portfolio Rebalancing

During periods of market volatility, certain asset classes and investments tend to perform better than others. This can cause the mix of investments in your portfolio to drift from their target weights and your desired risk profile.

Rebalancing helps realign your portfolio with your investment goals and risk tolerance. This process typically involves selling a portion of your investments and using the proceeds to buy more of others.

For instance, suppose your target allocation is 60% stocks and 40% bonds. After a sustained market upswing, your portfolio is now 70% stocks and 30% bonds. To ensure your portfolio remains in line with your financial plan and investment policy, you’d likely sell a portion of your stock holdings and use the proceeds to buy more bonds.

By using marketing volatility to your advantage and rebalancing periodically, you can maintain a diversified portfolio that supports your financial goals. Keep in mind if you work with a fiduciary financial advisor like SageMint Wealth, your advisor will likely manage this process for you.

#3: Tax-Loss Harvesting

Capital gains taxes can eat away at your investment returns over time—specifically in non-qualified investment accounts. Tax-loss harvesting allows you to sell investments that have declined in value to offset your potential capital gains tax liability.

Many investors leverage this strategy at year-end as they look for ways to lower their upcoming tax bill. However, you may be able to use market volatility to your advantage by harvesting losses throughout the year.

Depending on market movement and the investments in your portfolio, you may be able to completely offset your gains and even reduce your taxable income in some cases. However, be sure to consult a financial professional or tax expert first to avoid costly mistakes.

#4: Diversifying a Concentrated Stock Position

If you have a large portion of your wealth tied up in a single stock, market volatility can be particularly nerve-wracking. Diversification, or spreading your investments across a variety of assets, can help mitigate the risk of permanent capital loss.

You may be able to use market volatility to your advantage by strategically selling off portions of your concentrated stock position and investing the proceeds in different assets. That way you can reduce the impact of any one investment’s performance on your overall portfolio and net worth.

Indeed, managing a concentrated stock position can be complicated and may trigger surprising emotions depending on how you acquired it. Yet at the same time, proper diversification is often necessary for long-term financial security.

A financial advisor like SageMint Wealth who specializes in equity compensation and concentrated stock positions can help you develop a tax-efficient strategy to diversify your portfolio.

#5: A Roth Conversion Can Help You Use Market Volatility to Your Advantage

Lastly, a volatile market environment can also be an opportune time to consider a Roth conversion.

This strategy involves converting a traditional IRA to a Roth IRA, so your future withdrawals in retirement are tax-free. Plus, unlike traditional IRAs, Roth IRAs don’t have required minimum distributions (RMDs), which can increase your taxable income in retirement.

The key is that the conversion itself is a taxable event, so a lower account value means a lower tax bill. Therefore, converting your IRA to a Roth account when asset prices are depressed can save you money while positioning your portfolio for long-term, tax-free growth.

Keep in mind a Roth conversion is a complex tax planning strategy that doesn’t make sense for everyone. Be sure to consult a financial advisor or tax expert if you’re considering converting your traditional IRA to a Roth.

SageMint Wealth Can Help You Use Market Volatility to Your Advantage

Investing is a journey, not a destination. And like any journey, there will be ups and downs. However, with a solid plan and a steady hand guiding you, you can use market volatility to your advantage and position yourself for long-term financial success.

SageMint Wealth can help you develop a long-term financial plan and investment strategy that aligns with your financial goals, so you can navigate turbulent markets with confidence. To learn more about how we help our clients achieve their financial goals and see if we may be the right fit for your planning needs, please contact us.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.