Volatility Definition
Volatility is the amount and frequency with which an investment fluctuates in value. A volatile market gives traders opportunities to make money quickly, but also leaves room to lose money quickly as well.
Planning Strategies for a Volatile Market
Market volatility can bring about fear and loss for investors, but it can also provide some unique planning opportunities. One potential action to consider in volatile times might be capital tax-loss harvesting, a technique that enables investors to sell securities that have lost value in order to offset realized capital gains and maintain their desired exposures. Another strategy to consider is converting traditional IRAs or 401(k)s that have experienced declines to Roth IRAs, which grow income tax-free and do not have RMDs and qualified withdrawals are tax-free. Finally, there are several estate planning opportunities that investors could consider in volatile markets. For one, intra-family loans can be particularly powerful when interest rates are low, and this is often the case during bouts of volatility. Similarly, Grantor Retained Annuity Trusts (GRATs) rely on an interest rate called the 7520 rate, which tends to follow the same pattern of going down during market instability. While these strategies may not be right for all investors, they can be beneficial for many during otherwise trying times.
As an investor, there are steps you can take to prepare for the next market correction and ultimately feel more at ease when it occurs. First and foremost, you should establish a long-term financial plan and stick to it. This plan should include your goals, wants, needs, and your current budget and assets. Having a solid plan in place means that you also have a long-term investment horizon and allocate assets accordingly. Because the market’s best and worst days tend to occur near each other, it’s also important to stay invested so as not to miss out on the market’s best days and end up losing money or not earning as much in the long term. Finally, investors should always have cash set aside in case of emergencies and should revisit their financial plan as often as necessary to make sure it still reflects their wishes and needs. By following these steps, it is easier to remain calm during periods of market fluctuations and avoid losses that can result from emotional investment decision-making.
Is Volatility Good or Bad?
Volatility is neither good nor bad only, it is just a natural part of the markets and their cycle. On one hand, volatility can be considered good in that it provides investors with an opportunity to make money. In the same way, it can be considered bad for some, as it also results in losses for some investors and across some asset classes.
