5 Tips for Building Wealth in a Volatile Market Environment

Building wealth in a volatile market environment can be challenging, but there are several strategies you can use to increase your chances of success.

So far this year, investors have been experiencing heightened volatility as markets adjust for an unpredictable future. Inflation just hit a new 40-year high, there’s a war in Ukraine, and global markets appear to be bracing for recession. The result is a highly volatile market environment. Fortunately, there are several strategies investors can use to continue building wealth, despite unwelcome volatility.

Consider these 5 tips for building wealth in a volatile market environment:

#1: Bolster your emergency fund.

When volatility is high and the future seems uncertain, it can affect more than just your investments. This may mean layoffs, downsizing, and restructuring as companies adjust their growth outlook. Therefore, now may be a wise time to shore up your cash savings and emergency funds.

As a rule of thumb, most financial professionals recommend an emergency fund somewhere between 3 to 6 months of living expenses, with the following considerations:

  • 3 months of living expenses if you have high job security or a dual-income household with similar income levels.
  • 6 months of living expenses for single income households or lower levels of job security.

But remember that these are just rules of thumb, not specific recommendations. The proper cash savings for your situation will depend on your unique goals, lifestyle, and risk tolerance.

When it comes to building wealth in a volatile market environment, the first step is to protect yourself against downside risk. Having a sufficient emergency fund helps you avoid going into debt or dipping into your retirement savings if you experience a financial setback. Indeed, both can have negative consequences on your financial future. Automate your savings and dollar-cost-average.

#2: Put saving and investing on autopilot.

Next, consider automating good money habits to continue building wealth in a volatile market environment.

When markets are turbulent, investors can be their own worst enemy. Volatility can be scary, especially for those in or approaching retirement and watching their nest egg fluctuate dramatically. You may feel the urge to pull back, stop investing, or even panic-sell and go to cash.

Unfortunately, this often makes it difficult for investors to reach their financial goals. Ultimately, attempting to time the market leaves them worse off than if they had continued to invest.

One of the best ways to avoid this trap is to automate your savings and investment contributions. By automating your savings and setting up specific contribution amounts weekly, bi-weekly, or monthly, you can remove emotion from the equation.

You can also make sure new contributions are automatically invested according to your investment plan. This strategy is known as dollar-cost-averaging. And it can be one of the most powerful ways to continue building wealth in a volatile market environment.

Dollar-cost-averaging is investing a set amount in your target portfolio at consistent intervals. An example may be contributing to and investing $500 per month within your retirement plan. By investing routinely no matter how the market is performing, dollar-cost-averaging tends to lower your average cost basis over time. In other words, this strategy can actually boost returns in the long run.

As opposed to trying to time the market or attempting to “buy the dip,” a dollar-cost-averaging strategy removes the guesswork. And historically, dollar-cost-averaging has produced better results for investors than market-timing.

#3: Consider rebalancing your portfolio.

As different asset classes perform differently over time, your portfolio can drift from its original asset allocation. For example, you may have started with a portfolio of 80% stocks and 20% bonds. Yet after a year like 2021 when equities had double-digit returns, your stock allocation may dominate your portfolio. This can be problematic because your portfolio is now riskier than your investment plan suggests.

Indeed, changes like this can happen very quickly in a volatile market environment. Depending on how much your asset allocation has changed, you may want to consider rebalancing your portfolio back to its original weightings.

At its core, the mechanics of rebalancing your portfolio are straightforward. You buy more of the investments that have decreased in value while reducing the investments that have appreciated. This strategy helps you avoid deviating from your investment plan and risk profile. And, like dollar-cost-averaging, it can help you continue building wealth in a volatile market environment.

#4: Harvest losses when appropriate.

Watching your investments decline in value can be hard to stomach. However, falling asset prices can also create unique tax savings opportunities for savvy investors. Indeed, minimizing your potential tax bill can be key when it comes to building wealth in a volatile market environment.

For example, tax-loss harvesting is a strategy that involves selling assets that have fallen below your original cost basis. This, in turn, creates a loss, which can be used to offset taxable gains in your portfolio. Here’s how it works:

  • By selling investments at a loss, you create a capital loss.
  • Then, you can use that capital loss to offset capital gains for the year, up to any amount.
  • In addition, extra unused losses can be used to offset ordinary income, up to $3,000 per year.
  • Any unused losses can then be carried forward to future years.

This can be a very valuable tax strategy for investors with losses in their investment accounts. However, certain rules apply, and in practice this strategy can be complicated.

Fortunately, if you work with a fiduciary financial advisor, they’re likely to rebalance your portfolio and harvest losses for you, so you can continue building wealth in a volatile market environment.

#5: Turn off the financial news and avoid checking your portfolio.

Lastly, one of the keys to building wealth in a volatile market environment is keeping your emotions in check.

The stock market can be a wealth-generating machine in the long run. It can help investors take seemingly small amounts and grow them consistently through the power of compounding. But, if you zoom in on a specific month or year, the stock market can be down big. By zooming out and focusing on the big picture, you can begin to limit or eliminate the effect volatility has on your emotions and finances.

In other words, the volatility you experience is directly tied to how often you check your portfolio and consume financial news. To minimize your discomfort so you can ultimately stay the course and meet your financial goals, don’t be afraid to tune out and focus on what you can control instead.

Yes, building wealth in a volatile market environment is possible. Here’s how we can help.

Ultimately, building wealth in a volatile market environment is possible with the right approach. At Milestone Asset Management Group, we offer our clients the peace of mind that comes from working with a trusted and experienced financial advisor. We specialize in helping our clients plan for a healthy and secure retirement while handling all of their tax planning, preparation, and estate planning needs in-house.

We know you’re busy balancing work and family life, often leaving little time to manage your own money. And we also understand the importance of a solid financial plan when it comes to securing your financial future. If you’d like to learn more about how we can help, please schedule a complimentary call with a member of our team.