Articles
February 9, 2021

What Should Your Financial Advisor Do in a Volatile Market

In times of uncertainty, people need to understand their investment strategies and consider how to strengthen their portfolios.

Financial advisors can help. Their professional advice assists investors in smoothing over any emotions that arise during volatile markets, and their knowledge of market strategy informs a client’s future decisions. Financial advisors also offer longer-term guidance to help people achieve their financial goals.

The sound advice that an investor gets from a financial planning advisor addresses the various options available during volatile times, as markets swing one way or another.

What Is a Volatile Market?

A volatile market refers to the swinging motion of investments. While investors expect a reasonable amount of volatility on a regular basis, extreme spikes or dips cause concern.

What Causes Market Volatility?
Many different types of events and trends can cause market volatility.

In some cases, a specific challenge for a major company may bleed into the sector as a whole, and cause greater volatility across an industry.

In many other cases, core causes affect practically the entire market. For instance, changes in central bank policy or other political events can have a major market impact.

Many of the root causes of market volatility involve uncertainty. When investors and other stakeholders can’t predict outcomes for any reason, markets tend to get more volatile. That includes disasters or emergencies like the pandemic, trade issues, or geopolitical tensions. For example, when people considered the economic impact of COVID-19, major market indexes went down over 30 percent from their recent high points. This major decline caused many investors to panic and make hasty investing decisions based upon emotion.

What Should a Financial Advisor Do in a Volatile Market?
A financial advisor wears many hats during volatile markets. He or she serves as a grounding force to worried clients, and may even act as a “behavior coach”, so clients learn how to approach these situations with level heads.

This pragmatism helps clients stay cool during volatility and maintain a long-term focus on financial goals. While guiding clients emotionally through volatile markets, financial advisors will also be engaged in different kinds of research around short-term and long-term positions.

Lastly, they will also take into account the client’s acceptable level of risk and overall positioning through a portfolio.

The Importance of Financial Advisors During Volatile Markets
Financial advisors have a wealth of knowledge that makes them invaluable during volatile times. They will have access to the latest research and can offer a historical perspective to educate their clients. During volatile markets, financial advisor helps their clients strategize and stay grounded. While the fear and anxiety created by unpredictable markets are understandable, your financial advisor’s calm and timely advice may keep you from making rash decisions based on your emotions and guide you towards small achievements that will pay off in the long term.

Part of that emotional balance is understanding that the current market volatility cycle will come to an end and that an investor can aim to be well-positioned to weather the storm with the right strategy.

Questions To Ask Your Financial Advisor in a Volatile Market

What Is My Risk Tolerance?
Everyone’s risk tolerance is different, but there are some general guidelines that apply.

For instance, financial advisors often counsel younger career professionals to take on relatively more risk, since they can afford to keep money in the market for the long term. The closer that a retirement saver gets to their actual retirement, the more a financial planner and the client may dial down the risk because the investor won’t have as much time to wait out a volatility cycle if one occurs.

That simple course of decreasing risk over time is a very powerful part of securing retirement income. In other words, someone’s risk in one year is not the same as their risk in another year.

Beyond that, financial advisors have to listen to their clients and have conversations about that person’s individual goals. Some people are much more likely to wager money on a particular sector or even a particular company. They do this often according to their own personal views on market outcomes and how they feel about a certain company or sector. Then they can balance those things with the sound financial planning provided by their advisor.

Those who feel more comfortable with conservative risks may receive smaller rewards when the stock market does well, but a high-risk tolerance can prove dangerous when stock prices drop. Your financial journey should start with complete and thorough risk analysis in order to better understand the type of proactive plan your portfolio needs to pursue your financial dreams.

The good news: financial advisors can adjust and update your risk tolerance and risk capacity as your life and goals change.

Should I Be Taking Action?
Not every sign of fluctuation requires action. Discuss your individual situation with your financial advisor to discover different options and the potential consequences. Your financial advisor can advise you on what steps they may or may not be taking. For example, Churchill Management Group’s tactical strategies aim to preserve capital in times of high risk through the use of cash or cash equivalents.

What Is Normal?
In this case, the idea of a ‘normal’ reaction isn’t “one size fits all.” Everyone has a unique financial position that warrants different plans of attack during rewarding and troubling markets. A discussion with your financial advisor will help you understand what normal means for you during volatile markets and guide you to creating a long-term plan that addresses your specific concerns.

If I Want To Take Action, What Are My Options?
Even during rough times, investors have options. For some, volatility offers unique opportunities to buy certain stocks that investors have confidence will rise in value again. Even small investments that take advantage of the lower stock prices help strengthen a portfolio once the stocks start to bounce back. For those who prefer more conservative options, they might want to consider a tactical investment strategy that aims to lower market exposure in times of high risk.

How Can I Optimize My Current Financial Situation?
Volatile markets give you an opportunity to reassess your portfolio now that you have more knowledge and experience. To begin, you can assess non-necessities in your financial plan and opt to focus on bigger goals. A comprehensive consultation with your financial advisor could address how to create a multi-strategy, diverse investing plan with the goal of protecting yourself during erratic times. It’s also important to keep in mind that your investment plan is active, not static, and the types of investments that suit you best will fluctuate with time.

Commonly Asked Questions About Market Volatility

What Are the Pros and Cons of Market Volatility?
Volatility by itself does not signal something wrong with the market. In fact, a normal amount of volatility has pros and cons. For example, extreme spikes may indicate high rewards for certain stocks, while a dip in prices may offer a chance to buy promising stocks. Financial advisors should help you prepare for the inevitable volatility of the market when creating investment plans.

How Do Experts Measure Volatility?
In the simplest terms, volatility represents the swinging movement of market investments. To measure volatility in the stock market, experts use the Standard & Poor (S&P) 500 stock index, which refers to the stocks of the 500 largest publicly traded U.S. companies, like Microsoft or Facebook. Experts will calculate the difference, or standard deviation, between how much each month’s return differed from the year’s average monthly return, essentially calculating market volatility. Another method of measurement focuses on the daily price of movements, though this does not mean you have to intently watch every movement in the markets. It’s all a matter of gaining foundational knowledge and staying aware.

Does a Rise in Volatility Warrant Concern?
Rising volatile markets may indicate a coming drop, which means the possibility of greater short-term losses and the need to address financial concerns with an advisor. However, just as a soaring market can proceed to drop, the opposite remains true, too. Dips in the market may lead to rebounds, as is the natural movement of investing.

Some kinds of volatility that are extreme may be tied to ‘recessions’ or ‘depressions’.

While these can be significantly challenging for national economies and the global economy as a whole, they don’t have to be ruinous for an individual investor who has a sound financial planning strategy.

How Do I Approach the Market With This Understanding?
Investing takes a certain amount of trust that with proper preparation and understanding, clients can weather the market swings. This means working and partnering with a financial advisor who will properly address your goals through multi-strategy solutions and a holistic approach to investing.

Churchill Management Group can be trusted not only with your investable assets but with your future. Since 1963, they have honed their knowledge and skills to provide the best possible financial advice and management. Their team offers robust and innovative financial planning services to give you clarity, focus, and direction in your financial life. When times become unpredictable, rest assured that Churchill can update and revise your financial plan to help ensure you’re always aiming to move closer to accomplishing your unique goals. To contact Churchill Management Group, fill out their contact form or call +1 (877) 937-7110.

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