How Do You Help Clients Navigate Volatile Market Periods?
To guide you through effective strategies for navigating clients through volatile market periods, we asked financial planners and wealth managers for their expert advice. From acknowledging feelings and educating on volatility to preparing clients for market downturns, here are the top six strategies these professionals shared.
- Acknowledge Feelings and Educate on Volatility
- Plan Investments in Different Buckets
- Use Tactical and Alternative Strategies
- Create Personalized Investment Plans
- Maintain Emergency Funds and Diversify
- Prepare Clients for Market Downturns
Acknowledge Feelings and Educate on Volatility
The first step is to always acknowledge the client’s feelings. Then I try to educate them on the historical context of market fluctuations and how volatility is a normal part of the investment process and can actually create opportunities. Investing should always be approached for the long term, and the focus should remain on the averages over time, and not the short-term fluctuations. Lastly, a diversified portfolio can help mitigate risk and protect against significant losses. The key is to stay focused on your goals and objectives and to try to block out all of the negative ‘noise’ that clients are bombarded with on a daily basis.
Plan Investments in Different Buckets
Volatile markets are part of investing. It is that simple. As you navigate retirement, you need to understand that you will have volatility. The way to plan for it is by having your investments in buckets. You want a short-term bucket that is cash, bonds, maturing bonds, etc., where you have little volatility and know those funds are fully accessible, especially in a market downturn.
Then you want a mid-term bucket that is moderate risk. And then a long-term bucket that is higher risk since volatility is less of a need and you still want growth for the long term.
But it really all comes back to education. You need to understand how the stock market works, what sequence-of-returns risk is, and you need to have a portfolio you believe in and can stick with through volatility.
Use Tactical and Alternative Strategies
My team and I do this in a combination of ways. The first thing that is part of our investment strategy is to use tactical strategies for part of the portfolio. Tactical strategies allow the managers autonomy in volatility to pull back risk or even move to cash if needed. We also use other varying strategies like defined-outcome ETFs or buffered ETFs. These could have the ability to absorb the first 10-30% loss of an index and the client loses nothing.
The other strategies we use could be alternative investments like commodities, gold, silver, or even real estate. Alternative investments tend to not correlate (move in the same manner) as the main indexes like the S&P 500. My team and I also have access to institutional investments (which normally have extremely high minimums of 1 million or more) and we have access to them at lower levels for the right clients.
Periods of uncertainty or more volatility, there isn’t a right or wrong answer. However, having access to all the strategies and resources to decide what is best for our clients empowers us and the clients to make the best decisions possible.
Create Personalized Investment Plans
Navigating clients through volatile market periods starts with an investment plan designed to meet their goals and objectives, regardless of market fluctuations. My goal as an advisor is to ensure that my clients take no more risk than necessary to achieve their financial aspirations. We stress to our clients that time in the market is always better than timing the market. Understanding the emotional side of investing is crucial; it’s my job to help manage expectations and keep clients committed to their long-term plans. We advise our clients not to compare their portfolios to broad indices like the S&P 500. Instead, we create a personalized index because, at the end of the day, if we beat the market by 2% but our clients run out of money in retirement, did we really win?
Maintain Emergency Funds and Diversify
Cash is king (or queen) and allows you to think with a clear and level head while the market is volatile. We encourage clients to maintain an emergency fund so that they have the desired amount of cash as well as anything additional that they might need for upcoming expenses.
Asset allocation, diversification, and rebalancing are the names of the game. We have many conversations with our clients at the beginning of the relationship to understand their appetite for risk and help to put the right strategy in place for the portfolio. We then invest the portfolio so that it is represented across different asset classes, geographies, sectors, and industries. The goal with a diversified portfolio is to invest in asset classes that are not highly correlated with one another; it can help mitigate volatility. On an ongoing basis, we rebalance regularly to help ensure the portfolio stays in line with the desired strategy.
Prepare Clients for Market Downturns
The most important factor in helping clients through volatile markets is preparing them for market downturns before they happen. As long-term investors, I make sure that my clients understand that market downturns are incredibly normal. In fact, since the 1980s, there has been a market pullback of 5% or more every single year except for 2 years (1995 and 2017). In every single downturn, the market has not only recovered but gone on to reach new highs. This understanding allows clients to have greater peace of mind when volatility hits and gives them the courage to stay invested. This helps prevent my clients from reacting emotionally and making the mistake of going to cash in the midst of a downturn, which would significantly hinder the performance of their accounts in the long term.
