A Lesson, and Test, in How to Weather Market Gyrations

The subprime loan debacle continues to cause volatility in the markets, leading to the Federal Reserve Board’s decision August 17 to improve market liquidity by cutting its discount rate (not the Fed funds rate) by 50 basis points to 5.75%, and a Federal Open Market Committee separate announcement on the same day that noted that the “downside risks to growth have increased appreciably. The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.”

Advisors are taking at least two courses of action to the volatility: telling clients not to panic through this short-term bumpy ride, and repositioning clients’ portfolios to weather the bumps. Ron Rhoades of Joseph Capital Management in Hernando, Florida, says he’s not worried because his firm “uses a disciplined approach to rebalancing” clients’ portfolios. “Our clients are trained to anticipate market downturns,” he says, adding that he’s been telling his clients via personal phone calls over the last two weeks that “short-term volatility happens, and it’s nothing to worry about.”