Who doesn’t love a good market rally? It’s the time when investment account balances continue to move higher and retirement options continue to solidify.
Market Rallies and the Reality of Pullbacks
But we know that markets don’t move up in a straight line, despite what we’ve seen over the past few months. According to Ned Davis Research, market dips of around 3% happen about seven times per year on average, and corrections of 5% or more occur roughly three times annually.
In other words, pullbacks aren’t unusual, they’re a normal part of the investing landscape that investors should anticipate even when the backdrop is strong.
And here’s the thing: since April’s selloff, the S&P 500 index has not experienced a sustained market dip greater than 3% and that’s worth noting.
What goes up, must come down, right? Maybe for a bit, then often right back up. That’s the mindset we want to focus on: enjoy the rally, yet be ready for the routine setbacks that come with healthy markets.
Staying Grounded is Essential
That’s why now, more than ever, is the right time to stay grounded and position your portfolio for an inevitable bout of market volatility. Now, preparation doesn’t necessarily mean pessimism, but rather it’s how you participate in the upside while keeping your footing when markets take a breather.
Because if you don’t, you could end up leaving money on the table when the market pulls back.
How so?
Well, the fact of the matter is that there are two key areas that you’ll want to be prepared for when the markets eventually take a turn.
First, not giving up gains unnecessarily by avoiding mistakes that leave money on the table.
Second, not missing out on potential tax planning opportunities when asset prices do pull back.
Taken together, these help you stay constructive and benefit across cycles.
Let’s take a look at this more closely.
What the Current Market Is Telling Us
So far this year the S&P 500 index is up over ten percent. And while this double-digit return for domestic stocks is quite notable, it’s also worth noting that international stocks are up well over 20% so far this year.
There’s a case to be made for the ongoing rally in international stocks and risk assets in general, especially as interest rates fall and the dollar continues to weaken.
Even so, while risk assets continue to rally higher on expectations that the Federal Reserve cutting interest rates will make it more favorable for risk assets to rally, the very backdrop that prompts policymakers to cut rates suggests U.S. economic growth could still face headwinds.
And while the U.S. economy has been generally steady in 2025, there’s a very real potential that any incoming data pointing to fractures in the solid growth story could give investors reason for pause, leading to a market pullback.
That kind of pause is consistent with history and with the Ned Davis data on frequent, modest setbacks, not a reason to abandon a long-term plan.
Why Cash and Taxes Matter Most
In anticipation of this market pullback, there are two things to consider doing before the market actually turns, and some actions you can take when the markets are actually in a pullback.
To start, cash is king when it comes to periods of heightened market volatility. That’s why now is the time to evaluate your cash management plan and make sure that your reserves are properly topped up to cover the unexpected.
This means that if you’re still in your working years, make sure you have between 6 to 9 months of cash on hand or liquid assets available just in case to cover unexpected expenses.
And if you’re already retired or approaching retirement, now would be the time to make sure that you have between 12 and 18 months of liquid cash reserves available to cover your living expenses. The last thing that you want to do during a market downturn is sell assets at an inopportune time and lock in losses.
Think of cash as both a defensive buffer and an offensive enabler that lets you avoid forced selling and gives you flexibility to act on opportunities when others can’t.
The second approach to take and consider when the inevitable market pullback does come is to think about how you’re positioning yourself from a tax perspective. More specifically, one of the big things that we focus on during periods of market weakness is taking advantage of Roth conversions.
That’s because market sell-offs temporarily lower asset values, giving us an opportunity to realize lower taxable amounts when moving money from qualified accounts like IRAs or 401(k)s into a Roth IRA and positioning those assets for future tax-free growth and withdrawals. This is a clear example of not leaving money on the table: using normal volatility to improve your after-tax outcomes.
Staying Grounded with Cautious Optimism
When it comes down to it, nobody wants to be the person who washes away a market rally by thinking about or talking about the potential for a pullback.
Nevertheless, history has shown repeatedly that all good things include periodic setbacks. And when they do, they often happen without warning, happen suddenly, and lead to regret for the unprepared.
Acknowledging that reality is part of being cautiously optimistic: we respect the risks so we can stay invested for the rewards.
While there’s a case to be made for assets to continue to rally in the months ahead, there’s no better time than the present to practice prudent portfolio management.
Sticking to a disciplined investment strategy, keeping appropriate cash reserves, using volatility-aware tax strategies like Roth conversions, and rebalancing your portfolio help ensure you’re not leaving money on the table and not paying Uncle Sam any more than his fair share.
That’s how you remain grounded and prepared for when the markets eventually rally once again.