During periods of market volatility, it’s common for investment advisors to receive an increased number of calls and emails from clients panicking as they see their account balances decrease. The most common response I hear from our industry is to tell the client, “Don’t worry about market volatility. We’re using a long-term approach for your investments. Market volatility is normal. The stock market typically recovers and grows over time.” Even though these things are true, the response is not particularly helpful in calming a client’s anxiety.
Imagine visiting a therapist to discuss something you believe will negatively impact your future. You describe your fear, but the therapist merely says, “Don’t worry about the fear you are feeling. These situations typically get better over time.”
I don’t know about you; I would have a hard time paying for that type of advice.
Instead of responding to clients’ fears with a predictable line about staying the course, I want to give you solutions to help them reason through their fear. If done properly we can help clients think about market volatility as an opportunity instead of a time to panic.
Before jumping to solutions to deal with it, we need to first identify what market volatility is. In general terms, volatility stems from uncertainty. The essential variables of the market mean there is always some degree of uncertainty. But when the market’s variables move outside of expectations, it makes it more difficult for analysts to determine a company’s value. Generally speaking, this increased uncertainty leads to increased volatility.
Examples of uncertainty caused by market variables are changing interest rates, unemployment, government regulations, taxes etc. When these variables stabilize typically market volatility goes back to normal.
Next, we need to have stories to further explain market volatility so clients can begin a new relationship with it. After all, volatility isn’t going away so we might as well have the best relationship with it as possible. Here is one of the ways I like to explain market volatility to clients. For the stock market to remain strong over time, it needs ways to flush out companies that become overvalued and to realign stock prices with their intrinsic value. One way the stock market does this is through periods of market volatility. It prompts analysts to reassess a company’s value. If the downturn is prolonged, it could cause companies that cannot provide long-term value to go out of business. Market volatility, in many ways, is a stress test of the financial system, helping expose things that shouldn’t be there.
To further explain this idea, I use the analogy of forest management. Just as controlled burns are necessary to protect the forest, market volatility helps remove overvalued companies, ensuring the financial ecosystem remains healthy. When you watch a controlled burn, it seems like it’s only causing damage, but the fire is doing something important. The fire removes dead trees and brush that, left alone, could cause catastrophic damage to the whole forest. Every ecosystem, including the stock market, needs a way of removing things that shouldn’t be there. Doing so helps ensure the ecosystem continues to thrive in the future.
After the client sees market volatility as a way the financial ecosystem flushes out things that could cause harm in the future, we need to help them identify the opportunity it offers. The most common opportunity during periods of market volatility is to deploy excess cash to buy investment shares that are on sale. I often refer to a client’s cash reserves as “dry powder.” Back in the day when battles were fought with muskets and cannons, military leaders would commonly say keep your powder dry to act when an opportunity strikes. Having a portion of cash (i.e. “dry powder”) in a client’s portfolio allows them to fight back at market volatility.
In conclusion, market volatility is an inherent aspect of the financial ecosystem. By understanding its causes and viewing it as an opportunity, clients can navigate it effectively. Deploying excess cash during periods of volatility allows clients to buy investment shares at a discount, helping them to feel empowered, stay invested, and reach their financial objectives. As investment advisors, it is our core obligation to guide clients through these turbulent times and help them see the potential benefits of market volatility. I hope your phones continue to ring, not with calls of panic but calls of clients who understand the opportunities afforded by market volatility!
Please contact me if you would like to discuss these ideas in more detail or if you would like additional resources to create new market volatility opportunities with your clients.
