The Silver Lining of Stock Market Volatility

August 5, 2022

Recent headlines about high inflation, rising interest rates and volatility in the stock market are designed to catch your attention. These snippets of information can spark fear or leave you wondering about the impact on your own financial situation.

However, when you understand economic and market activity in the context of what’s been ‘normal’ over time, you’ll find there are several silver linings in stock market downturns, and our recent situation is no cause for concern.

Here are four positive opportunities that can accompany stock market volatility.

Potential for investments to grow in recovery. Buying assets when the market is low means they’ll likely grow when the market rebounds. History has shown that the stock market is a bit of a roller coast, but it’s gone up more often than down. Although past performance is no guarantee of future results, waiting for the market to stabilize could mean missing out on years of big gains. In fact, some of the largest down markets were followed by significant rallies.

Opportunities to reduce your taxable income. As investments in your portfolio grow, they incur capital gains. This increases your taxable income. However, when the stock market dips, you have an opportunity to sell an asset at a loss to offset those gains. This practice is called tax loss harvesting, and it allows you to avoid paying unnecessary taxes on capital gains, which might only be gained in the short-term.

Forced conversations about important planning topics. When your portfolio’s value is steadily climbing and cash is flowing, most people don’t reach out to their financial advisor. In a market downturn, however, there is often more frequent communication with your financial partners. These conversations quickly turn to important planning topics to ensure your future is secure no matter what the market does. An investment strategy is only one component of a financial plan, and market volatility underscores the need for confidence in your big-picture plan for financial independence. Economic uncertainty should prompt a review of your retirement plan, household budget, insurance policies, estate plan and business plan, in addition to your investment strategy.

Limited impact on your long-term financial outcomes. A financial plan should be designed around your needs and goals many years from now. The strategies in place should give you a high probability of reaching those goals in the long run, but you don’t need to achieve them all today. Rarely are investment portfolios built or distributed in a lump sum; rather, you’ll accumulate and withdraw money a little at a time over a long period. When you don’t need access to all your money today, a temporary market correction should not have a significant impact on your long-term success—because your portfolio will likely return to or exceed its previous value by the time you need it.

Few people react to stock market volatility with excitement. However, seeing a downturn as an opportunity for growth is not unfounded optimism. It can be an important trigger to ensure your future and family are well-planned for and that you’re making the most of the market’s ebbs and flows.

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