The real danger for investors does not lie in market volatility itself, but in their reaction to it
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Market fluctuations can make it hard for investors to remain calm and focused on their investment goals. But the reality is that volatility is a feature of financial markets. As such, the real danger for investors does not lie in market volatility itself, but in their reaction to it. At this point, financial advisors would need to intervene and talk to investors about some of the fundamental and timeless investment principles that can help them maintain composure through volatile times.
How should you talk to clients about market volatility?
When markets are going volatile, prepare yourself to do the following:
Lend your ear
The best time to listen to clients is during periods of volatility. Let them know that you are available to talk if they have any fears or concerns. What clients fear most is the unknown, according to Investopedia. A good idea is to schedule meetings to review their portfolio. But do not assume that you know what they will say or how they are feeling, even if they have invested with you for years. The client who always seems calm about the markets may not feel that way this time.
Keep an eye on their plan
Market volatility periods are also a good time to review clients’ overall situation. Show them how the current swings were considered in the planning that you have done with them. Provided that it is true, show them how they are still on track toward their financial goals. Your review should focus on how their portfolios are positioned, reassuring them that their asset allocation is still appropriate.
Being a good advisor is not about reacting to the changing market conditions; it is about reassuring clients that they are on track and you are on top of their situation. Clients should know that even if they cannot control the markets, they can control their financial plan, and if they have a strong plan, they can withstand volatility.
Tell them to have a long-term perspective
Volatility periods are also a good time to remind clients of the benefits of thinking long-term and the potential drawbacks of making investment decisions based on emotions. A good question to ask a client looking to reduce exposure to stocks, for example, is “if we sell now, when will you get back in?” Although most clients understand that it is nearly impossible to time the market, most also have trouble aligning their emotions with the data.
Keep them from following the herd
Investors tend to become overconfident by buying high when markets boom and leaving during a recession, thereby locking in their losses. Help your clients avoid this classic investment trap to ensure that they make the most of their investment plan. Help them avoid acting on their fears and impulses. Ensuring that your clients patiently plan over an investment lifetime is an effective approach, according to Zurich.
Help them see volatility as an ally
Understanding market cycles can help your clients avoid making rash, emotional decisions. Help them see that volatility is an ally, as the best years usually follow the worst. If they pull out their investment just after a market crash, they may also miss out on the market rally. Rather than trying to pick the best time to enter and exit the market, it may be better to sit tight and ride out market fluctuations.
How can you help clients minimize risks during market volatility periods?
Below are some strategies you can use to minimize your clients’ risks from market fluctuations:
Diversification
Portfolio diversification is a process that involves investing in various types of securities and investments from different issuers and industries. Investing in many areas is done so that even if one fails, the rest will ensure that the portfolio as a whole remains secure.
Diversifying your clients’ portfolio across uncorrelated asset classes mitigates risk as the assets invested are less likely to underperform all together. Generally speaking, investors are rewarded for taking some risk with their investment, and assets like equities and bonds have the potential to earn higher returns than cash.
Dollar-cost averaging
Dollar-cost averaging (DCA) is an investment strategy that involves buying a fixed dollar amount of a particular investment on a regular schedule regardless of the share price. Investing on a regular basis helps investors smooth out market fluctuations.
DCA works most effectively in volatile markets, allowing your clients to buy more units and increase their purchasing power when the markets are down, thus capitalizing on volatility and making their money work for them. When they invest regularly, the average price they pay per unit can get lower than the average unit price for that period.
More than managing market volatility itself, a financial advisor’s job is to manage clients’ behaviour when they see markets fluctuating. Proper communication is the key to help clients avoid exposure from the dangers of immediately reacting to the changing market conditions.
