5 Ways to Benefit From a Volatile Stock Market

Key Takeaways

• Hands-off investors can use a multi-asset investment fund, such as a target-date fund, to gain from volatility without much effort.
• More-involved investors can consider using their cash holdings to maintain their target allocations.
• Volatile markets can provide a good time to make portfolio changes that could bring tax benefits in the future, particularly in your retirement accounts.

Susan Dziubinski: I’m Susan Dziubinski, co-host of The Morning Filter podcast. Investors have certainly experienced a good deal of market volatility this year, and there may be more ahead, but volatility isn’t always a bad thing. In fact, there are ways investors can use volatility to their advantage. How so? Let’s find out from my colleague Christine Benz. Christine is Morningstar’s director of personal finance and retirement planning, co-host of The Long View podcast, and author of the book How to Retire. Christine, great to see you.

Christine Benz: Susan, it’s great to see you.

How Delegators Can Benefit From Market Volatility

Dziubinski: All right. Well, we’re in a volatile market, and you’ve brought us some strategies today for different types of investors. Let’s start with a strategy for those extreme hands-off investors. They don’t want to be messing around. They don’t want a bunch of discrete parts to manage, and they rarely make changes. What should these hands-off investors be considering in a volatile market?

Benz: Well, the best strategy for delegators, and I love delegators, is to think about using some all-in-one type multi-asset investment fund, maybe a target-date fund or a fund that maintains a static allocation. And the beauty of those vehicles in an environment like this is that your fund is a buyer of whatever hasn’t done especially well. You might not feel like going out there and buying stocks on those down days. Well, guess what? Your fund is doing it for you. It’s just a great strategy for people to have in their back pocket. If they want to try to tune out the market but know that they’re doing the right thing, the all-in-one funds really do the heavy lifting for them.

Increasing Retirement Contributions During Volatility

Dziubinski: You say another strategy for these hands-off investors, though I think this is probably a strategy that other investors could also use during market volatility, has to do with your retirement plan contributions. Talk about that.

Benz: It’s kind of a chicken way to be aggressive in a down market, but the idea is if you can find a way to bump up your contributions a little bit, that’s a great way to take advantage of market volatility. You’ve got more money working for you in the market. And the good news and the reason that it’s kind of a chicken strategy is you’re not taking a big load of cash and moving into the market all at once. You’re just committing to making higher contributions in the future that’ll help your long-term retirement savings rate, and it will also help you partake of market volatility and make sure that you are taking advantage of it.

Hands-On Investing Strategies for Market Volatility

Dziubinski: Let’s move on a little bit, maybe toward investors who are a little bit more hands-on. Maybe they don’t want to delegate their investment decisions to just one all-in-one fund. What are some strategies that these investors might consider in a volatile market?

Benz: Right. I am still encountering people who have sizable cash allocations where maybe they had a windfall, and it didn’t quite feel like a great time to get the money invested, or maybe they took money out of stocks because they were nervous, and they haven’t wanted to get it back in. If you can get your cash put to work for you and maybe in line with whatever your target asset allocation is, that’s a great strategy and a great way to take advantage of volatility. I know we have a lot of active stock investors on the site and watching these videos as well. You always talk about keeping watchlists of stocks and keeping track of where companies are relative to your price targets for them. So, if you are a watchlist-type investor, keeping tabs on your potential holdings and seeing whether your companies are hitting your price targets, that’s another great strategy if you want to be a little more active.

Portfolio Strategies to Take Advantage of Volatile Markets

Dziubinski: You also say that volatile markets can also be a good time to make portfolio changes that might actually help you on taxes at some point down the line, particularly in your retirement accounts. Talk about that.

Benz: Right. These are some of my favorite strategies. And granted, we haven’t had enough volatility yet where most of these strategies would be warranted, but Roth conversions are typically going to trigger a tax bill, and the taxes that you’ll owe will depend on however much you converted and your cost basis in those positions relative to your sale price. And so if you can do those conversions when the market is down, that will translate into a lower tax bill than if you’re making these conversions in an upmarket. That’s one to consider if you have traditional tax-deferred balances, whether in an IRA or a 401(k). It can often make sense to look at doing at least some conversions in those down markets. I would caution that typically while you’re still working and in your peak earnings years, though those won’t typically be great years to do conversions.

It’s more in the postretirement period where that can be a very lucrative time to consider conversions. Another strategy I would call out, Susan, is what’s called taking your required minimum distributions in kind. So, if you have holdings in your portfolio where you want to maintain exposure, maybe you think they’re cheap for whatever reason, you can move them in kind. And this is assuming that your IRA platform allows this, you can move them in kind into your brokerage account, into your taxable brokerage account. So there’s no tax benefit. The taxes due on that RMD will be what they will be. The potential tax benefit might come down the line, though, where if that asset subsequently appreciates a lot, if you think it’s good and cheap in your IRA, take it out, put it in that taxable brokerage account. If it subsequently appreciates a lot, the taxes that you will owe, assuming that you have held it for at least a year, will be at the long-term capital gains tax rate, which is 15% for most investors. So, it allows you to pay taxes on that RMD at a relatively low level if you think the position is cheap. It’s kind of a niche strategy, but one that active stock investors especially might consider.

Smart Moves for Taxable Accounts

Dziubinski: OK. And then lastly, you say there are some things that investors might do during a volatile market in their taxable accounts that would be smart moves. What are they?

Benz: The obvious one here is to look at tax-loss selling to see if you have positions that are currently trading below your cost basis in them. If you’re a broad-market investor, if you buy broad-market exchange-traded funds or mutual funds, you probably won’t have a lot of easy pickings in terms of tax-loss sale candidates. Individual stock investors may have more opportunities, or if you have more narrow-bore positions, say you have a large-growth ETF that you just purchased this year, and you bought a large position. There, you may have some opportunities to do some tax-loss selling. So, it’s a matter of comparing your cost basis relative to whatever the stock is selling for and seeing if you can’t find some positions to sell, and you can use those tax losses to offset up to 3,000 in ordinary income or capital gains if you have them elsewhere in your portfolio as 2026 unfolds. So, it’s a nice strategy to consider in down markets.

Dziubinski: Well, Christine, these are all great strategies for volatile markets. Appreciate your time, and it’s always good to see you.

Benz: Always good to see you, too, Susan. Thank you.

Dziubinski: Thanks. I’m Susan Dziubinski. Be sure to tune into The Morning Filter and The Long View each week wherever you get your podcasts. Thanks for watching.

Watch 5 Costly Mistakes to Avoid in Today’s Unpredictable Market for more from Christine Benz and Susan Dziubinski.

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