Market volatility is a part of the investment experience and seasoned investors understand that acting emotionally can be more harmful than helpful. It is always appropriate to understand and prepare for market volatility and downturns, even when markets are going up. Investors should not let market movements force them to lose focus. A knowledgeable investor understands that markets go up but they also can go down.

Volatility is a statistical measure of the distribution of returns for a given security or market index. For example, when the stock market rises and falls more than one percent over a sustained period of time, it is called a “volatile” market.

The U.S. economy is not supposed to be highly volatile, but equity markets are a different story. Market volatility doesn’t mean that stocks are headed for a down or bear market. Even if there are market corrections along the way an investor can still potentially experience reasonable returns over a long period of time.

What is stock market volatility?

Stock market volatility is a measure of how much the stock market’s overall value fluctuates up and down. Just like equity markets, individual stocks can also experience volatility. An investor can calculate volatility by looking at how much an asset’s price varies from its average price. Standard deviation is the statistical measure commonly used to represent volatility.

Some stocks are more volatile than others. Shares of an established large blue-chip company may not make very big price swings, while shares of a high flying and newer tech company may do so often. Stock market volatility can occur, especially when external events create uncertainty.

Why is volatility important?

By understanding how volatility works, you can put yourself in a better position to evaluate stock market conditions as a whole. You can then analyze the risk involved with any particular security and construct a stock portfolio that is a great fit for your growth objectives and risk tolerance.

It’s important for investors to be aware that volatility and risk are not the same thing. For stock traders who look to buy low and sell high every trading day, volatility and risk are deeply intertwined. Volatility also matters for those who may need to sell their equities in a short timeframe, such as those who are older and closer to retirement.

For long-term investors who tend to hold equities for many years, the day-to-day movements of those equities need to be understood. Volatility is part of the noise that could come while you are allowing your investments to compound long into the future.

Long-term investing still involves risks, but those risks are usually related to being wrong about a company’s growth prospects or paying too high a price for that growth – not volatility.

A quick review of some market terms.

Oftentimes, we hear the wrong words used in the wrong context. For educational purposes, we feel it is important to clarify some stock market words and their definitions.

“Dip” – a short-lived downturn from a sustained longerterm uptrend.

Example: Equity markets increased by 5% and maintained that level and then dipped back down to 3% all within a few days or weeks.

“Correction” – a 10% drop in the market from recent highs. Historically corrections occur an average of about every eight to 12 months and last about 54 days. (thebalance.com 3/9/20)

Example: On December 17, 2018, both the DJIA and the S&P 500 dropped over 10% and declines continued into early January.

“Bear Market” – a long, sustained decline in the stock market. If the market declines 20% from its recent high, this is considered the start of a bear market.

Example: On Wednesday, March 11, 2020, The DJIA dropped 5.9%, for a total decline of 20.2% from a record high on February 12, 2020.

“Crash” – a sudden and dramatic drop in stock prices, often on a single day of week. Crashes are rare, but typically happen after a long-term uptrend in the market.

Example: In 1929 the market crashed when it lost 48% in less than two months, ushering in the Great Depression.

Position yourself to best navigate market volatility.

No matter what equity markets are doing, your plan should align itself with these three items.

1. Your investing goals,
2. Your financial timeline; and
3. Your risk tolerance.

Your Investing Goals

Every investor has unique goals they would like to attain. Knowing what your goals are is the first step to creating a path to achieve them. Your goals will determine your time horizon and risk tolerance.

Your Financial Timeline

Focus on your personal timeline instead of trying to time the market. During downturns, it may be tempting to pull out of the market, but you may miss out on a healthy recovery. Try to plan for your equity investments to maintain a long-term horizon and ignore the short-term fluctuations.

Remember, short-term movements of the market are unpredictable and do not abide by any average. For many long-term investors there is no reason to even subject themselves to daily market headlines. If you have a long term investment horizon for your equity holdings of at least five years, chances are the current volatility will pass – possibly in a couple of weeks, months or at the most, a few years.

According to a JP Morgan analysis, even missing a few days of a market recovery can be costly. This analysis looked at the S&P 500 over a 20-year period (January 2000 to December 2019). Investors who stayed fully invested would have earned more than 6% annually. However, those investors who missed just 10 of the days with the highest daily returns would have earned only 3% annually. During those 20 years, six out of the 10 best days occurred within two weeks of one of the worst 10 days.

Your Risk Tolerance

Risk tolerance is the level of uncertainty you are willing to accept in order to reap potentially greater rewards. Knowing what your risk tolerance is, or risk awareness, should be part of your financial plan. As your financial professional, one of our primary goals is to help you create a plan that considers your risk tolerance. If you are not quite sure what your risk tolerance is, call us and we can help assess and determine this for you.

What should an investor do in a volatile market?

First, make sure you know what not to do: and that is panic. In times of market volatility, investors tend to become unnerved and anxious. This is usually not the best mindset to make rational decisions.

When equity markets experience unsettling fluctuations, we suggest you ask yourself three questions:

1. Have my financial timelines changed?
2. Have my financial goals changed?
3. Has my risk tolerance changed?

If you can answer “YES” to any of these questions, we highly suggest that you discuss these changes with us. As an investor, you need a plan that includes risk awareness. One of our primary responsibilities as your financial professional is to help create a plan with risk awareness. We know that an integral part of this is to consistently keep in touch with you and monitor your situation.

If you have concerns, some questions to ask us include:

Regardless of whether or not equities are rising or falling, investors should always put their main focus on their own personal objectives. This includes:

1. Making sure you are comfortable with your time horizons.
2. Re-assessing your risk tolerance.
3. Re-confirming your investments are compatible with both your time horizon and risk tolerance.
4. Maintaining liquidity for all short-term and near-term needs.

Even when equities are performing well, investors still need to be prepared. Market volatility should cause concern, but panic is not a plan. Market downturns do happen and so do recoveries. It is always healthy to confirm that you fully understand your time horizons, goals and risk tolerances. Looking at your entire picture can be a useful exercise in determining your strategy.

It is always helpful to make sure you are comfortable with your investments. Equity markets will always have the potential to move up and down. Even if your time horizons are long, you could see some short-term downward movements in your portfolios. Make sure your investing plan is centered on your personal goals and timelines. Peaks and valleys have always been a part of financial markets and it is highly likely that trend will continue.

Discuss any concerns with us!

We are always available to revisit your financial holdings to make sure they are still congruent with your timeline goals and risk tolerance.

As a reminder, please keep us apprised of any changes (such as health issues or changes in your retirement goals). The more knowledge we have about your unique financial situation the better equipped we will be to best advise you.

We pride ourselves in offering:

• Consistent and strong communication,
• A schedule of regular client meetings, and
• Continuing education for every member of our team on the issues that affect our clients.

Registered Representative offering securities and advisory services through Independent Financial Group, LLC (IFG), a registered broker-dealer and investment advisor. Member FINRA/SIPC. Financial 1 Wealth and IFG are unaffiliated entities.

This article is for informational purposes only. This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary. For specific advice about your situation, please consult with a lawyer, tax or financial professional. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.

Sources: JPMorgan.com; thebalance.com; Contents provided by the Academy of Preferred Financial Advisors, Inc.

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Proactive Retirement Planning Using the New SECURE Act

Setting Every Community Up for Retirement Enhancement

An Overview of Some Key SECURE Act Changes That May Affect Your Retirement Strategy
Law enacted on December 20, 2019

On December 20, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law. This new legislation made major changes to a number of tax rules that govern retirement savings. Many of these changes started in 2020 and some of the details are still being finalized.

Making retirement plans more available to Americans and encouraging retirement savings was the driving force behind the creation and enactment of the SECURE Act. It includes significant changes that all retirement savers should be aware of for retirement and tax planning purposes.

Familiarizing yourself with how the SECURE Act may impact your current retirement plan and discussing it with a knowledgeable financial professional can help you proactively and properly amend your strategy to adjust to the SECURE Act changes.

Proactive Tax Planning with the SECURE Act

Here are some of the changes that may affect retirement savers and their tax strategies:

• The Required Minimum Distribution (RMD) age was raised from 70 ½ to 72.
• The age limit for traditional IRA contributions was eliminated.
• A new 10-year rule essentially requires (there are some exceptions) all inherited IRAs, Roth IRAs, and qualified plans to be distributed within 10-years of death.
• There are new 529 Education Fund Rules.
• There is a 10% retirement account penalty exception for both births and adoptions.

For informational purposes only: this information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary. For specific advice about your situation, please consult with a lawyer or tax professional.

The policy behind the Required Minimum Distribution (RMD) rule is to ensure that individuals spend their retirement savings during their lifetime and not use their retirement plans for estate planning purposes to transfer wealth to beneficiaries.

Qualified Charitable Distributions (QCDS) are a potential strategy for retirement savers.

While they are not new or changed by the SECURE Act, under today’s tax laws and with more taxpayers using standard deductions, Qualified Charitable Distributions (QCDs) of up to $100,000 are available to an IRA owner over 70 ½ years old. They are many times used as a proactive tax planning strategy for anyone over 72 taking a Required Minimum Distribution (RMD). An amount directly given to an eligible charity processed as a QCD counts toward your RMD requirement and reduces the taxable amount of your IRA distribution. This QCD lowers both your adjusted gross income and taxable income, resulting in a lower overall tax liability. It also lowers your income for purposes of calculating if your social security is taxable. By using, or preparing to use, a QCD, you can potentially meet your RMD requirements and satisfy your charitable intents, all while reducing your taxes.

Please note, for tax return filings, your IRA custodian is not required to specially identify the QCD on your annual 1099-R form. The responsibility is on you to inform your tax preparer that you used a QCD. If you do not let your preparer know, they could report this transaction as fully taxable, which would negate the benefit of your smart planning. Also, the distribution must be made directly to a qualified charity.

This is a specific area where a financial professional can offer some suggestions and strategies. We would be happy discuss with you whether or not this tax saving strategy may beneficial to your specific situation.

Potential New 10-Year Rule Strategies

Potential New 10-Year Strategies: Roth IRA Conversions

The new 10–Year rule reminds us that a proactive approach could potentially reap rewards. To maximize your situation under the new 10-year rule, you may want to consider Roth conversions and possibly spreading distributions over many years and lower brackets. Unlike distributions from regular IRAs, Roth IRA qualified distributions are not taxed.

Roth IRA Conversion Considerations

Your personal critical decision factors include your:

• Tax rate differential (tax in year of conversion vs. tax rate in withdrawal years).
• Use of “outside funds” to pay the income tax liability.
• Need for IRA funds to meet annual living expenses.
• RMD considerations (remember these begin at age 72 for non-Roth IRAs).
• Time horizon (how old are you and how long can you defer taxes).
• Estate tax considerations.
• Ten-year Rule.

Potential Benefits of a Roth IRA Conversion

• They could lower overall taxable income long-term.
• ROTH IRAs enjoy tax-free compounding.
• ROTH IRAs have no RMDs (at age 72).
• ROTH IRAS allow tax-free withdrawals for beneficiaries.

Each case can present different opportunities and it is best to talk with us or your tax professional about your specific situation.

We understand this decision can be complex and these are not easy choices. We are here to help you review your personal situation and recommend the best course of action.

Family Tax Bracket Management©

A critical area to review due to the SECURE Act is what we refer to as overall Family Tax Bracket Management©. Mathematically speaking, if you are in a higher tax bracket than your beneficiaries, it might make sense to let them take distributions in their tax bracket rather than you in yours. However, if your beneficiaries are in a higher tax bracket, it might make sense to take distributions in your bracket, convert these accounts to Roth IRAs and leave them an account that still has to be taken out in 10 years, but can grow tax free.

Something to Consider: even if NO changes are made to tax rates, in 2026 current law states that tax brackets will return to the older higher rates.

One strategy we can help with is to review you and your beneficiary’s marginal tax rate(s) each year.

Should I leave my beneficiaries a Traditional or Roth IRA?

Over your lifetime, you may accumulate assets in tax deferred retirement accounts like 401(k) plans and traditional IRAs. When thinking about the assets you have accumulated in your retirement accounts, a key issue is tax efficiency. Accumulating assets in a tax efficient way is only one part of the strategy, the other complex part is withdrawing those assets while attempting to minimize taxation. A common goal is to try to proactively plan withdrawals from retirement accounts to minimize your tax liability.

The SECURE Act creates an opportunity to review your retirement plan with an eye for tax planning. Determining the most efficient ways to either withdraw or pass to your beneficiaries your accumulated wealth is always an important decision. Our goal is to remain aware of changes that affect our clients and then share those changes with them. We want to provide proactive tax planning ideas when possible.

If you would like to discuss your retirement plan and withdrawal strategy, please call us. Our goal is to understand our clients’ needs and to monitor their wealth. We can discuss your specific situation at your next review meeting or you can call to schedule an appointment. As always, we appreciate the opportunity to assist you in addressing your financial issues.

Could it get worse, or will it get better? How long will this last?

We know these are many investors primary questions. A large part of the answers will depend on when the growth rate of Covid-19 cases stabilizes and how quickly a cure can be developed and distributed. It will also depend on whether or not fiscal and monetary emergency measures are enough to help ease the economic crisis. While we are not clairvoyant, we are making our best efforts to stay aware of changes that could affect your personal situation. Our objective is to try to offer the most educated guidance to help keep you on track with your financial goals. We realize that this is a very emotionally straining time and we want to make sure you know we are here for you. Call us with any questions or help with any concerns you may have.

Panic and bad choices can cause more harm for investors than a virus or market downturn!

Help us grow!

This year, one of our goals is to offer our services to several other people just like you! Many of our best relationships have come from introductions from our clients. Do you know someone who could benefit from our services?

We would be honored if you would:

  Add a name to our mailing list, Bring a guest to a workshop, or Have someone come in for a complimentary financial checkup.

  Please call Financial 1 at 410-908-9293 and we would be happy to assist you!

If you are currently not a client of Financial 1 Wealth Management Group, we would like to offer you a complimentary, one- hour, consultation with one of our professionals. Please call 410.908.9293.

Registered Representative offering securities and advisory services through Independent Financial Group, LLC (IFG), a registered broker dealer and a registered investment adviser. Member FINRA/SIPC. Financial 1 Wealth Management Group and IFG are unaffiliated entities. Note: The views stated in this letter are not necessarily the opinion of Independent Financial Group, and should not be construed, directly or indirectly, as an offer to buy or sell any securities mentioned herein. Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. With any investment vehicle, past performance is not a guarantee of future results. Material discussed herewith is meant for general illustration and/or informational purposes only, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice. This material contains forward looking statements and projections. There are no guarantees that these results will be achieved.

All indices referenced are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. Stock market. Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal.

Diversification is used to help manage investment risk; it does not guarantee a profit or protect against investment loss. Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss. Contents provided by the Academy of Preferred Financial Advisors, Inc.

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