Taking the fear out of volatile markets
Advisors can help clients handle market uncertainty by separating emotion from facts
By: DAVID ISRAELSON
Date: December 16, 2015
In markets, turbulence happens. Advisors know how to recognize when a market is volatile; the harder part is working with justifiably nervous clients.
“The ups and downs of financial markets can be scary for investors,” says Michael Banham, vice-president of wealth distribution at Sun Life Financial in Waterloo, Ont.
“While investors should focus on making logical, careful decisions that support a long-term goal like retirement, a person’s personality type or emotions can cloud their investment decisions,” he says.
Emotional responses to volatility can lead to choices that are “not in their best interests,” says Mr. Banham. Working with an advisor will help clients separate emotion from facts when it comes to volatility.
“Sticking to a long-term plan is important. While it is difficult to predict market cycles, the markets’ values have recovered from declines. A downturn can actually be a good time to invest, but clients need to work with an advisor to assess their comfort level with risk,” he says.
Dan Bortolloti, investment advisor at PWL Capital Inc. in Toronto, points out that there will always be a certain amount of volatility an any equity market.
“Volatility is one of the reasons stocks have delivered higher returns than other asset classes over the long term,” he explains.
“If stocks delivered predictable and stable returns over time, those returns would be much lower. Volatility is the price you pay for the higher expected return over time.”
Eric Brown, associate investment advisor at Canaccord Genuity Wealth Management in Edmonton, suggests that clients should have a strategy for volatile markets before they actually happen.
“As a financial advisor, I aim to help clients come up with a strategy that works within their risk tolerance. By having a plan and strategy in place, investors are less likely to make emotional decisions in the middle of a volatile situation,” says Mr. Brown.
To mitigate the impact of volatility on a client’s portfolio, advisors consider a combination of factors, says Mr. Banham, including a client’s financial goals, time horizon (number of years until they plan to use the money) and risk tolerance.
For example, the mix of investments will likely be different for people closer to retirement than for people 20 years or more away from retirement.
“For those with shorter investment time horizons, guaranteed or fixed-income investments should always be considered as a way to lessen the risk of market volatility,” he says.
A market is considered unusually volatile if its ups and downs deviate beyond statistically standard swings that are measured over time, explains Mr. Banham. A volatile market can deliver unusually high returns as well as unusually large losses; whether an investor wants (or can afford) to take a chance should be thought through and discussed.
“Clients working with an advisor usually revisit their plan at least once a year and compare it to their investment statements to ensure they are on track,” says Mr. Banham.
“This is important, since life is not a straight path, but rather a journey with turns and surprises. Clients may find that their financial goals shift, or that changes in the economy or the financial markets require them to reconsider some of their assumptions.”
This is why it is important to work with an advisor, notes Mr. Banham. “Advisors talk to clients regularly during a volatile market. Advisors will reinforce and reassure clients about their portfolios and long-term goals, keep them calm, and help them stay focused so they don’t make emotional decisions about their investments that they may regret later,” he explains.
“Advisors will also remind clients that despite market uncertainty, if they keep making regular contributions to their retirement plan, ideally through automatic payroll contributions, they won’t have to worry about market volatility. They’ll know that regular contributions toward, for example, an RRSP should result in investments purchased at lower prices during market downturns.”
For investors who continue to be concerned about market volatility, advisors will also discuss and explain the value of guarantees inherent in segregated fund products, adds Mr. Banham.
“Segregated fund products have an insurance component that guarantees the owner will receive a certain minimum percentage, usually either 75 or 100 per cent of the initial investment upon death or maturity of the contract,” he says. In addition to those guarantees, some segregated fund products offer guaranteed income for life.
While segregated fund products do provide protection, Mr. Banham notes that they have fees that are generally higher than retail mutual funds to cover the cost of this insurance guarantee. “Segregated fund products are often purchased by security-conscious investors who want to participate in the upside potential of investment markets, but with some downside protection for their capital,” he says.
Mr. Banham concludes by saying for clients with higher risk tolerance, a volatile market can be a chance to pick up value buys. “And working with an advisor can help you understand your tolerance for risk and what makes sense to your plan.”
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