By Jim Joseph, CFP®
I’ve played ice hockey most of my life, and a core lesson from the rink carries straight over to investing: the teams that win over long seasons tend to be those that keep pucks out of their own net.
While obvious on the surface, that lesson feels particularly timely this fall. Stocks have held up well in 2026 despite uncertainty over interest rates, tensions with Iran, and lofty AI valuations (see our recent market update, A Resilient Market in an Uncertain Environment). A market this far into a run can keep climbing. It can also turn quickly, and late in a cycle the swings often get bigger in both directions.
The math of losses is unforgiving, however. A 20% drop may need a 25% gain just to get back to even, and a 50% drop may require a 100% gain back. That’s why our playbook for choppy markets starts on defense.
How the FSA Safety Net® Manages Downside in Falling Markets
At FSA Wealth Partners, we work from a simple principle: you succeed by avoiding losses. Our proprietary FSA Safety Net® puts that principle to work. Each holding in our actively managed strategies has a predetermined exit point, set before we buy it.
If an investment falls through that level during a sustained decline, our investment team sells and moves the proceeds somewhere more defensive, such as cash or short-term bonds. When trends improve, the team looks for opportunities to put that money back to work.
Here’s a hypothetical illustration, made up for this article and not based on any client or actual performance: Say a fund holding is bought with an exit point about 10% below its recent high. A sharp sell-off drags it through that floor level and the position is sold. If the market then falls another 20%, that money is already on the sidelines and is saved from a further loss. The ensuing capital is then reassigned from the cash or short-term bonds when indicators stabilize.
This methodology isn’t foolproof; no investment strategy eliminates all risks. The FSA Safety Net® can sell and then watch the market bounce and its results have at times been unprofitable. We accept that trade-off because a small, controlled loss is far easier to recover from than a large one.
Behavioral Pitfalls and Rules to Counter Emotional Investing
Volatility tends to test portfolios, and it tests the people who own them even more. Behavioral finance research has long shown that a loss stings roughly twice as much as an equal gain feels good. That imbalance often pushes investors to sell near bottoms and sit in cash through the recovery. “Recency bias” adds fuel, convincing us that whatever happened last week will keep happening.
Here are the rules we lean on to keep emotion out of the driver’s seat:
- Decide your “sell” discipline in advance. FSA Safety Net® exit points are set while markets are calm, so nobody makes the call in a panic.
- Wait 48 hours before requesting a discretionary shift outside your agreed-upon strategy. A weekend’s perspective has a way of cooling a hot decision.
- Check your accounts on a schedule, such as monthly, rather than every time the market dips.
- Call your advisor before acting. Talking it through with someone who knows your plan can keep one bad week from undoing years of good decisions.
Tax-Aware Rebalancing and Strategic Gain Realization in Choppy Markets
Volatility can knock portfolios off-target rather quickly. Rebalancing brings you back in line, but in a taxable account every sale can trigger a tax bill, so the order of operations tends to matter in avoiding investment and tax mistakes.
- Start where taxes don’t apply. Rebalancing regularly (or when markets have made a massive move) inside IRAs and 401(k)s creates no immediate tax and intended allocations among holdings can be reset to be more consistent.
- Down days also create tax-loss harvesting opportunities. Selling a position at a loss and replacing it with a similar (but not identical) investment can offset gains elsewhere, plus up to $3,000 of excess losses may be deducted each year with the remainder carried over to future years. Just watch the 30-day wash-sale rule.
- Gains deserve a plan too. For 2026, married couples filing jointly pay 0% federal tax on long-term capital gains up to $98,900 of taxable income, 15% up to $613,700, and 20% above that.
Also note the 3.8% net investment income tax once modified adjusted gross income passes $250,000, and the top federal rate reaches 23.8%. Spreading large gains across tax years can keep more of your profit working for you.
Appreciated shares can also go to family or charity. The 2026 annual gift exclusion is $19,000 per recipient, and the One Big Beautiful Bill Act (OBBBA) tax law set the lifetime estate and gift exemption at $15 million per person in 2026. Our FSA Get Wealth Planning Process™ coordinates these moves with your tax and estate plan, and our recent article on building an estate plan in the new tax reality is a good next read.
Liquidity Planning for Near-Term Cash Needs and Upcoming Expenses
The worst time to raise cash may be right after the market drops. If you know a big expense is coming, that money shouldn’t be riding the market’s ups and downs.
Start by listing what’s due over the next 12 to 24 months. For retirees, that includes regular withdrawals and required minimum distributions (RMDs) if you’re 73 or older. For wealth builders, it might be college tuition, a home renovation, or the fourth-quarter estimated tax payment due January 15, 2027.
Hold that amount in cash, money market funds, or short-term Treasuries, separate from your long-term investments. That cushion means a 15% market decline won’t force you to sell stocks at a discount to pay a tuition bill or take an RMD, and it makes the behavioral rules above much easier to follow.
Retirees have even more at stake. Selling investments during a downturn early in retirement (known as sequence-of-returns risk) can shrink a portfolio in ways that are hard to undo. Our article on the hidden costs retirement plans often miss covers how to build a withdrawal plan that holds up.
Let’s Build Your Volatility Playbook Together
You don’t have to guess your way through the next downturn. Whether you’re adjusting your defensive line in a hockey game or building out your cash reserves, let’s help your portfolio keep pucks out of the net.
If you’d like a second opinion on how your portfolio might hold up in a sell-off, our team would be glad to have a discussion
To schedule a meeting, call (301) 949-7300 or book a time online. Not quite ready? Sign up for the FSA Insider Newsletter to get our market updates in your inbox.
Frequently Asked Questions
What does “late cycle” mean for my portfolio?
Late cycle describes the stretch after a long economic expansion and market run, when growth may be slowing and stock prices look expensive relative to earnings. It doesn’t mean a downturn is around the corner, since markets can keep rising for years.
It usually brings bigger price swings, which makes now a good time to confirm your risk level, sell rules, and cash reserves that still fit your goals. Our advisors can review your current allocation and show you how it might respond to a sharp decline.
Should I move everything to cash if I’m nervous about a downturn?
Going all-in on cash trades one risk for another. You may sidestep a decline, but you then have to decide when to get back in, and missing a handful of the market’s best days can drag down long-term returns considerably.
A rules-based approach with predetermined exit and re-entry points takes that guesswork off your plate. That’s exactly how our team built its risk management process, and we’d be happy to walk you through how it works.
How much cash should I keep outside the market?
It depends on your spending needs and income sources. A common starting point is setting aside known expenses and planned withdrawals for the next 12 to 24 months in cash or short-term Treasuries, along with a separate emergency fund. Retirees drawing on their portfolios often lean toward the higher end of that range.
About Jim
Jim Joseph, CFP®, is the President and Partner of FSA Wealth Partners in Rockville, Maryland, where he has provided personalized financial advice and risk management strategies since 2004. Drawing on a financial career that began in 1997 at firms like Charles Schwab and Morgan Stanley, he specializes in guiding pre-retirees and retirees using the firm’s proactive FSA Safety Net® strategy to protect capital. A West Virginia University finance alumnus whose insights have appeared in The Wall Street Journal, Jim spends his free time with his three daughters, playing ice hockey, and working toward his private pilot’s license.
FSA’s current written Disclosure Brochure and Privacy Notice discussing our current advisory services and fees is available at www.fsawealthpartners.com/disclosures or by calling 301-949-7300.
