Your frequently asked questions about volatility

Text FAQs

How can I take advantage of market volatility as a trading opportunity?

First, make sure you're mentally prepared to manage the risks involved with trading in volatile markets and firm up your trading plan.

Then, focus on stocks trending with the market. Watch for stocks that are breaking through their usual resistance level--when prices are moving rapidly, an upside breakout can be followed by an immediate and substantial run to higher prices. At the same time, a reversal from a false breakout can come very quickly, so consider a stop-loss order to potentially limit your loss in case the price falls a certain distance below the breakout point. (Stop-loss orders can only potentially limit losses because there are no guarantees that stop orders will be executed at or near the stop price.)

Last, consider shorter-term strategies to exit trades quickly--since profits in volatile markets can vanish and turn into losses faster than you expect. For more details on all these strategies, read How Traders Can Take Advantage of Volatile Markets.

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I’m retiring earlier than I’d planned. How will early retirement affect my Social Security benefits?

You should be aware of two things:

First, you must wait until at least age 62 to start collecting Social Security, unless you fall under a very limited set of exceptions. 

Second, your final benefits may be less than the estimates provided by the Social Security Administration throughout your working life. Those estimates are based on projected lifetime earnings, and assume you will continue working right up until you start collecting Social Security benefits. If you stop working early—say, at age 58—with the expectation that you can hold out until your benefits kick in at age 62, your lifetime earnings will be smaller than projected, which will reduce your Social Security benefits in turn.  

There’s no “correct” claiming age for everybody. If you are 62 and can afford to wait, delaying Social Security generally entitles you to larger benefits. That said, these are difficult economic times and waiting may not be an option for everyone. Just make sure you have a realistic idea of how much Social Security will provide.

Read here for more information on how your retirement age affects your benefits. 
 

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What catalyst would cause the stock market to rally?

A stabilization and eventual decline in the number of COVID-19 cases (in both Europe and the United States) would likely calm investors’ fears and provide a boost to the market, as would a vaccine or effective treatment. Fiscal stimulus will also have to do a lot of heavy lifting, initially to provide an economic backstop and support the most needy individuals and businesses, and then later to help stimulate the economy.

Monetary policy can add stability to the financial system and help alleviate liquidity and funding problems. However, it’s not an elixir for what will increasingly ail the labor market and broader economy.

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Where can I hold my cash when markets are volatile?

It depends on how you plan to use the cash. There are two primary categories: (1) everyday cash and (2) savings and investment cash.

• Everyday cash is money that is needed for day-to-day expenses, paying bills and quickly placing trades. Typically ease of access is of top importance. You can consider holding this money in a checking account or in the uninvested part of a brokerage account.
• Savings and investment cash is money that is needed for an emergency fund (3 to 6 months-worth of expenses), short-term goals and/or as a long-term investment in a diversified portfolio. A competitive return (yield) may be more important than cash management features or immediate access. Options include a high-yield savings account, purchased money funds or certificates of deposit (CDs).

For more information, read Where Should You Hold Your Cash?

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Can the US government buy stocks to boost the market?

No. The government can’t currently buy stock in public companies. But the Federal Reserve can buy U.S. Treasury bonds and mortgage-backed securities issued by government-backed entities, like Fannie Mae and Freddie Mac. Expanding the types of securities the Fed can buy would require a change in the current law by Congress.

Some central banks around the globe, notably the Bank of Japan, have purchased stock, usually via exchange-traded funds (ETFs). This raises several conflict-of-interest issues by giving the government a partial (and potentially controlling) stake in private companies. It also puts the government in the position of picking winners and losers, based on how it invests.

Does the COVID-19 pandemic and its economic impact warrant revisiting the long-standing policy that prohibits the U.S. government from investing in public companies?  Some say we should reconsider it. And the economic stimulus bill currently moving through Congress has provisions that could give the government a stake in companies that use government-backed loan programs during the crisis.

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I need to take money out of my portfolio to cover expenses soon. How can I make selling assets in this down market as painless as possible?

Before you sell, have a plan that takes into account how transactions in today’s market could affect your goals and portfolio long-term. If you’re in or near retirement, this includes strategies to help protect against sequence-of-returns risk (the risk of permanently harming your portfolio’s potential growth due to large withdrawals in a down market).

One way to decide which investments to sell is to rebalance your portfolio. By selling overweight positions and buying underweight ones, you may be able to reset your target asset allocation and generate cash at the same time. You can also sell investments you don’t expect to perform well.

If your portfolio is already balanced or you need to generate more cash, consider two more things. First, if you plan to sell assets for a gain, consider selling those you’ve held for a year or more to take advantage of long-term capital gains tax rates (which are usually lower than ordinary income tax rates on short-term capital gains). Second, if you’re selling assets for a loss, remember that you can use those losses to offset gains.

For more information, read When You Have to Sell in a Down Market: How to Make the Best of a Bad Situation.

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How does it help the economy when the Fed lowers interest rates?

Lowering the cost of borrowing makes it easier for consumers to buy houses, cars, and other goods. Since consumer spending accounts for about 70% of economic activity, lowering rates to encourage consumption should help boost the economy. Lower interest rates also help businesses by reducing the cost of capital.

Businesses typically use bank loans or short-term borrowing to pay rent, meet payroll, and finance day-to-day activity. For businesses that issue bonds, lower rates may also help reduce the financing costs of long-term projects, like investing in new equipment or financing a new building.

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Is there any safe place to put my money that will generate a decent yield?

In general, higher yields require more risk. The safest investments are Treasury securities and FDIC-insured bank CDs. These investments are considered risk-free, but their yields are very low because the Federal Reserve has reduced its base lending rate to near zero. An investor looking for a higher yield will need to take on duration risk (potential drop or increase in value as interest rates change), credit risk, or both. This means buying a longer-term Treasury security, or a corporate or municipal bond.

Right now, 10-year Treasury yields are under 1%, which probably isn’t high enough to warrant the duration risk for most investors. Corporate bond yields are higher, but in an economic downturn or recession, the risk that the issuer might default on the bond also rises. Municipal bonds may provide somewhat higher after-tax yields for investors in higher tax brackets, but it depends on the maturity and credit worthiness of the issuer.

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I’m at retirement age. I don’t need the money in my portfolio right now, but I will soon. Given the current volatile market, how can I prepare my portfolio for future spending needs?

Determine when you may need to take withdrawals from your retirement portfolio, and how much you’ll need to take out. If you’ll need withdrawals to fund spending within the next four years, consider selling some of your appreciated investments and allocating the amount you’ll need from your portfolio over the next four years to cash investments and short-term bonds or funds.

For more information, read Investing for Income in Retirement.

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