Use These Tips to Guide Wary Investors Through Market Volatility

A review of world news is a little unsettling at the moment.

We have nuclear warheads soaring over Japan and an “epic” hurricane that has Houston underwater.

Meanwhile, modern-day Nazis are squaring off with Antifa leftists across the U.S. And a fractured political climate in Washington D.C. can’t get together on key policy issues like a national budget, tax reform, and health care.

With trouble on so many domestic fronts these days, more investors are looking to press the panic button and blow up an advisor’s carefully laid plans.

But hold the phone.

It’s not like the stock market is highly volatile these days – it just seems that way, optics-wise.

The CBOE Volatility Index, more commonly known as the “VIX” Index, has been actually stable for most of 2017, although it did rise slightly in the last week of August. Additionally, the stock market is a steady gainer. The S&P 500 is up 11.42 percent for the year, and is down only $2 after a turbulent 30-day August trading period.

Hardly reason to worry, right? Try telling that to spooked investors who have the itch to ditch any risky portfolio strategies, real or perceived. That sentiment is exactly what investment advisors have to resist in a period of high emotional volatility among investors.

“The biggest risk may not be market fluctuations themselves; it's our reaction to these fluctuations,” said Scott Thoma, a retirement strategist at Edward Jones. “That's why it's so important to have a financial advisor in your corner, helping you stay committed to your investment strategy.”

Other investors hold in too much cash because they want to avoid market risk, Thoma added.

“But not investing could actually increase your risk because you may not have enough growth in your portfolio to meet your goals or offset inflation,” he said.

Stay Diverse

Additionally, looking to place major bets on a single investment category -- for example, investing in oil after Hurricane Harvey closed down so many refineries -- is no better than dashing to cash.

“When you have a portfolio made up of a variety of quality asset classes and investment types, success isn’t tied to one company or one type of investment,” Thoma said. “While diversification cannot guarantee a profit or protect against loss, it can help smooth out the ups and downs of the markets.”

Investors and their advisers need to be aware of basic psychology – how the human brain responds to fear and greed in volatile and normal markets and that “recency bias” is one big problem.

“With a better awareness of these common psychological pitfalls, you can appreciate the need for a long-term investment plan to keep you calm when euphoria, panic or hype try to take control of your psyche,” said Benjamin Sullivan, certified financial planner with Palisades Hudson Financial Group in Austin, Texas.

Most people know not to make life-changing decisions while riding a roller coaster, for example, Sullivan said.

“Adrenaline, euphoria and fear are not conducive to critical thinking,” he noted. “Although the highs and lows of the stock market tend to have the same effect on an investor’s mindset as a high-speed amusement attraction, there are no safety harnesses to prevent ill-advised action in the rush of the moment.”

Then there’s preparation, which is a better antidote than panic, even if the market does slide backward, others say.

“The key is having a game plan on what to do before the bear market arrives,” said Alexis Hongamen, founder of Federal Retirement Investment Advisers in Orlando, Fla. “We all know it is coming - the question is when.”

Being prepared ahead of time will avoid a situation where investors are making decisions by the seat of their pants, under heavy financial fire.

“Plan out how you will handle a downturn,” Hongamen said. “Will you sell the discretionary portion of your portfolio once it falls a certain percentage? Will you look to buy more when everyone is selling? Or will you ride it out?

“A well balanced portfolio of a variety of investments can mitigate the impact of a quick 20 percent drop in the Dow Jones Index. Not having all your eggs in one basket will limit your downside exposure.”

'Just as Important'

Advisors wanting to reinforce the idea that preparation, and not panic, are the way to go in uncertain times, have several options, said Ryan McPherson, founder of Intelligent Worth, an Atlanta-based fee-only financial planning firm.

“Helping clients avoid panicked investment decisions was paramount during the financial crisis 10 years ago and it’s just as important now,” McPherson said.

He advocates taking these specific action steps when clients show signs of making “trigger happy moves.”

• Take a proactive approach to client communication. “This is key and worked incredibly well during the financial crisis,” McPherson said. “Rightfully so, clients hate worrying about unsettling events and then hearing from their advisor.”

• Get ahead of negative market rumors. Advisors should call and/or email those clients who get particularly rattled when talk of mayhem fills headlines. “Don't wait for them to call you,” McPherson said.

• Engage your clients as a group. “Webinars or conference calls work well to address a larger number of clients at once and connect with those who usually don't worry as much,” McPherson added.

• Be calm, and use history as your guide. Anxiety-inducing, market-rattling headlines have become the norm, McPherson said. “However, these stories and the underlying events almost never equate to an actual change in a client's financial situation or personal life,” he said. “Thus, no real shift in portfolio strategy is needed.

It's also helpful to remind clients of past events that seemed dire, but shouldn't have driven an investment adjustment, he added.

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at [email protected].

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