Market Volatility Concerns? Read On.

By Richard Rawlins, CFP^®

One of the great teachable moments in an advisor-client relationship is the stress test of a brief period of greater-than-average market swings. In periods such as these, a primary advisor mistake is to look for a new answer or idea with which to appease your client. Instead, pull from your core beliefs and look back at the best practices of investment management. Let the following suggestions top off your confidence and conviction.

If you are the least bit concerned about market volatility or you have received some client calls, that was your cue to take action immediately. Print your client list, start at the top and reach out to your clients. Have a discussion with them, not about market volatility, but just to touch base. Here are four questions to use as a call outline.

Four questions to begin the conversation:

• Would you outline for me any recent changes to your situation?
• How about your foreseeable future – is there anything that you see changing?
• Now, tell me about your feelings toward your money.
• Finally, has anything changed in the family dynamics?

If there are material changes or insights you’ve gained from having this discussion with your client, then it may be time to “re-model” the client’s strategic asset allocation. Otherwise, stay the course and stick with your pre-determined re-balancing process also known as your “buy/sell” discipline.

In addition, it’s important to remember your key role in the relationship – educator. You should be the one defining the key terms. For example, we should never use the word “performance” with our clients when we are discussing their portfolios. Instead, we must educate them that the only real measure should be risk-adjusted return. I like to use a quote I learned from Ted Ridlehuber at Cannon Financial:

“Because of the magnitude of your wealth and your station in life, it is vitally important that risk is managed to generate every dollar of return you get.”

As a backdrop for you to use if you find clients are apprehensive about the current market volatility, keep these reminders from Nick Murray about common investor mistakes handy.

1. Euphoria – defining risk as being outperformed by your neighbors rather than not financing your needs, wishes and legacy.
2. Panic – prices will never come back in our lifetime. On August 2, 2002, the DJIA closed at 8,313. Many Americans thought we would not see the Dow around 11,000 again.
3. Speculating when you still think you are investing. This is a line that is most often crossed during periods of market volatility. Speculators trade on the daily court of public opinion. They do not own a portfolio with a pre-determined strategic asset allocation, employing diversified, professionally managed holdings and keeping an eye out for over-concentration or unnecessary overlap into sectors.
4. The classic retiree tendency: investing for yield rather than total return. Don’t mistake current yield for total return. The investment with the highest current return will have the lowest long-term total return; the converse is also true. The asset class with the highest long-term total return will carry the lowest long-term current yield. A couple retiring today at age 62 will likely experience a 30+ year retirement for at least one of the two. A portfolio seeking only current yield today is doomed from the outset.

The Quantitative Analysis of Investor Behavior (QAIB) is updated each year using statistics from Lipper and Dalbar. For the 20-year period ended 2006, the average investor compound return is 4.3% versus the S&P 500 return over that same time period of 11.8%. All that you need to remember from this statistic is that if our clients have no guidance and coaching to navigate around common mistakes, their average return could be reduced by two-thirds!