Answering our investors' top market volatility questions

Hi there. I'm Vince Maimone, senior wealth advisor at Vanguard.

When the market experiences periods of volatility, the headlines often focus on how stocks are performing. But some investors are also worried about what's happening with their bonds.

If you're thinking about moving your money from bonds to cash, there are a few important things to keep in mind.

Cash is a great option for reaching short-term goals. For example, if you're planning a wedding or preparing to buy a house, cash might be the right choice.

But for long-term goals, overinvesting in cash comes with risk. If you move to cash during a downturn, and then try to time the market to get back in, you might miss out on potential gains.

Plus, cash has its own risk: purchasing power risk. If inflation goes up, the value of your cash can decrease, and you might lose more in the long run than you would have from market fluctuations.

So let's talk about the role that bonds play in your portfolio.

Bonds offer a steady income stream through regular interest payments, which can be especially comforting during uncertain times.

I find that younger investors with a longer timeline ahead see the benefit in having a small cache of bonds.

Early retirees or more conservative investors like to have a much larger allocation of bonds to help preserve their principal.

No matter what stage of life you're in, bonds also have another special benefit. They can help even out the market's ups and downs by diversifying your portfolio.

And diversification is key. Every asset class has a role to play.

Even when one asset class may be down, another in your portfolio may be up.

By diversifying, you're sacrificing some potential gains on the upside to mitigate losses on the downside.

Most people that I talk to find that the pain of a 10 percent loss feels a lot worse than the joy of a 10 percent gain.

So it's not always about maximizing growth. It's about mitigating the risk. And bonds can help you do just that.

Like I said, every asset class has a purpose. A portfolio full of cash or full of bonds shouldn't be on anyone's bingo card.

Instead, look to diversify so you can manage risk, help achieve financial goals, and provide yourself a little peace of mind.

Hi, I'm Vince Sobocinski, senior manager in Advice Methodology at Vanguard.

When the market is down, it's normal to feel unsure about your investments.

Right now, it's a great time to reflect on your goals, and financial plan, and resist the temptation to deviate.

If you're still wondering what actions you can take, there are 2 strategies that I often turn to during a down market: tax-loss harvesting and Roth conversions.

While we can't control market volatility, we can control our costs and taxes. That's where tax-loss harvesting comes in.

It allows you to reduce your tax burden by offsetting capital gains when you strategically sell investments that have lost value.

You can also reinvest money from the sale, rebalance your portfolio, and potentially improve overall performance.

When considering this strategy, it's important to recognize that there are some rules and limitations, including deadlines, the amount of losses you can claim each year, state-specific tax rules, and waiting periods.

A Roth conversion can be another valuable opportunity in a down market.

This strategy allows you to convert pre-tax dollars from a 401(k) or a traditional IRA into a Roth IRA. And when you convert pre-tax dollars to a Roth IRA, you pay taxes on the converted amount.

The key advantage is that the funds will grow tax-free in the future, and your withdrawals will be tax-free after age 59½.

In a down market, the value of your investments is lower, but this means you can convert a larger portion of your portfolio for the same tax cost.

For example, if you convert $5,000, you'll pay the same amount in taxes regardless of whether the market is up or down. However, in a down market, you can purchase more shares at a lower price, setting the stage for more tax-free growth over time.

While unpredictable markets can be challenging, they also present unique opportunities to optimize your financial strategy.

Always consult with a financial advisor to tailor these strategies to your specific circumstances, and ensure you make the most of these opportunities.