Finding the Silver Lining in Volatile Markets: Strategic Financial Planning in 2025

While news headlines might suggest otherwise, the reality is that most diversified portfolios have actually performed positively thus far in 2025, a fact that surprises many investors given the tenor of financial media coverage. Market volatility is an inevitable part of investing, but within these fluctuations lie opportunities for strategic financial planning.  

Strategic Opportunity #1: Tax-Loss Harvesting

While your overall portfolio may be showing positive returns, you may still hold some individual positions that are underwater. This presents an opportunity for tax-loss harvesting—a strategy that can help to reduce your tax burden.

What is Tax-Loss Harvesting?

Tax-loss harvesting is a technique used to reduce taxable income by selling investments at a loss to offset current or future capital gains. This strategy doesn't aim to invest in losing securities but rather to make the most of market volatility to enhance after-tax returns.

How It Works

The process is straightforward:

1. Identify investments in your portfolio that have declined in value
2. Sell these investments to realize the loss
3. Use these losses to offset capital gains from other investments that have performed well
4. If your losses exceed your gains, you can deduct up to $3,000 against ordinary income
5. Any remaining losses can be carried forward to future tax years

The end result is that less of your money goes to taxes and more stays invested and working for you.

A Real-World Example

Let's say you purchased shares of a technology fund that is now down 15%, representing a $10,000 loss. Meanwhile, another position in your portfolio has gained 20%, resulting in $15,000 of capital gains. By selling the underperforming tech fund, you can use the $10,000 loss to offset a portion of your gains, reducing your tax liability to just $5,000 of gains rather than the full $15,000.  

What we are doing

We have been proactively looking for losses to harvest in client accounts throughout the first part of the year and will continue to do so. This ongoing attention to tax-loss opportunities, rather than waiting until year-end, maximizes the benefit of this strategy in volatile markets.  

Strategic Opportunity #2: Roth Conversions 

Another powerful strategy during market volatility is converting traditional IRA assets to a Roth IRA. This approach can be particularly effective when certain segments of your portfolio have temporarily declined in value. What is a Roth Conversion? A Roth conversion involves moving funds from your pre-tax retirement account, such as a Traditional IRA, into a Roth IRA. Though you must pay taxes on the amount converted, the long-term benefit of tax-free growth and withdrawals often outweighs this drawback.

How It Works

During periods of market volatility, the value of your pre-tax IRA may decline. By converting a portion of this account to a Roth, you may pay taxes on a smaller market value and can experience the rebound in your tax-free Roth IRA.

Here's why this matters:

1. You pay taxes on the current (lower) value of the assets
2. When markets recover, all that growth happens in a tax-free account
3. You've essentially converted more assets at a "discount"
4. Future withdrawals will be completely tax-free

Strategic Considerations:

Rather than converting all at once, spreading the conversion out over several years may be a better strategy, allowing you to max out your tax bracket while managing the overall tax impact.  As we do every year, we will work with clients in the Fall on 2025 tax projections to determine if a conversion is warranted this year.

Strategic Opportunity #3: Investing Available Cash

Volatile markets also present an excellent opportunity to put available cash to work. When markets experience significant swings, quality assets often become available at attractive valuations.

1. Dollar-Cost Averaging Benefits: Investing during downturns allows you to purchase more shares at lower prices
2. Reduced Emotional Impact: Systematic investing during volatility helps avoid the psychological traps of market timing
3. Long-term Perspective: History shows that markets have consistently rewarded patient investors who buy during periods of uncertainty

The Cost of Waiting 

While it might feel safer to wait until markets "calm down," this approach often means missing the most significant recovery periods. Remember, timing the market perfectly is nearly impossible, and some of the best performing days often occur during highly volatile periods. 

Conclusion 

While market volatility can be unsettling, it creates valuable opportunities for strategic financial planning.  By focusing on these strategic opportunities rather than the alarming headlines, you can make the most of the situation.