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Portfolio > ETFs > Broad Market

Advise Clients On Weathering Volatility

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Many Americans have been living in a financial fantasy. During the last decade, extraordinary stock market gains had become almost commonplace.

However, accounting irregularities, corporate improprieties, global political instabilities, and a declining stock market have caused even the most intrepid investors to question their equity investments.

In fact, one in five investors is completely unsure of the most appropriate investment for the current economic environment, according to a new study commissioned by Northwestern Mutual Financial Network and conducted by Harris Interactive in June 2002.

In view of this, what advice can you, as a trusted advisor, provide to your clients?

The secret of sound investing can be said in one word: “Diversification.” You may not be able to predict with any certainty the markets next moves, but with diversification achieved through proper asset allocation, you can enhance returns while limiting the downside damage that market swings do to client portfolios.

Remember, no single investment performs well under all economic or markets conditions. By spreading your clients investments among growth, income and fixed assets, you can potentially reduce the impact that one poor performer may have on the overall portfolio.

The goal of any asset allocation strategy is to provide the highest expected return for a given level of risk–in view of your clients goals, time frame and risk tolerance. But dont stop there.

According to the Harris Interactive study, nearly one-third of Americans feel they have an increased need for advice from a financial professional, yet only half of these have spoken to an advisor.

This suggests its time to start a dialogue. So, in addition to discussing goals, time frame and risk tolerance, there are five other things to bring up with clients to make sure asset allocation is done effectively.

1. Monitor and rebalance. Ongoing portfolio monitoring and rebalancing (adjusting a portfolio investment back to the target asset allocation) are essential to keeping your clients investment strategy in line with specific objectives and tolerance for risk. Rising stock prices can distort your clients asset mix, inadvertently causing them to take on more risk than theyre prepared to handle. It may also cause them to miss out on higher return potential.

With a properly balanced portfolio, clients may end up with a more efficient portfolio over the long run and be positioned to benefit from all market cycles. (See chart.)

2. Tune out market “noise.” With heightened awareness and headlines from the media questioning investment choices, dont let emotions dictate your clients investment strategy. Also, dont allow yourself or your clients to be swayed by short-term performance, day-to-day market fluctuations or predictions of market timing “experts.”

3. Dont abandon stocks. When stock prices are as volatile as they have been lately, its tempting to move assets into more stable bond or money market funds. Over the long term, stocks have historically performed better than other types of investments. In fact, now may be a good time to reposition clients’ portfolios more aggressively.

4. Invest on a consistent basis. One of the most powerful ways to help reduce market risk is to invest regularly over time. This is an especially good time to talk to clients about dollar cost averaging, since it can smooth out the impact of market fluctuations. Staying focused on long-term goals and investing regularly regardless of what’s happening in the financial markets has been shown to be a more successful strategy than trying to time the markets.

5. Maintain a realistic perspective. Even a well-planned asset allocation strategy cant guarantee positive returns, particularly during prolonged dips in the market. Setting realistic expectations from the onset can ease the psyche of even the most nervous investors in volatile markets.

Finally, this may be a good time to reintroduce core insurance products such as life, disability and long term care. In the 1990s, many investors eschewed these traditional investment choices in favor of high yielding stock returns. But now, your clients may realize they may not be able to fund a disability or LTC situation from their stock market gains. And, as conventional wisdom has it, life insurance remains at the base of any sound financial plan.

is managing director at Mason Street Advisors, Milwaukee, Wis.

Reproduced from National Underwriter Life & Health/Financial Services Edition, August 12, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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