What Strategies Do Financial Advisors Use During Volatile Market Periods?

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    Advisor Brief

    What Strategies Do Financial Advisors Use During Volatile Market Periods?

    In the tumultuous seas of a volatile market, seasoned professionals like an Investment Advisor and Portfolio Manager rely on strategies such as advising clients to maintain confidence in long-term goals. Alongside expert insights, we've gathered additional answers that provide a spectrum of tactics employed during these challenging periods. From the prudent use of hedging as a form of market insurance to the adoption of a dollar-cost averaging strategy, discover how experts navigate clients through market instability.

    • Advise Long-Term Perspective
    • Remind Clients of Planned Volatility
    • Implement Forward-Thinking Asset Protection
    • Suggest Portfolio Diversification
    • Increase Cash Holdings for Flexibility
    • Utilize Hedging as Market Insurance
    • Maintain Goals with Portfolio Rebalancing
    • Adopt Dollar-Cost Averaging Strategy

    Advise Long-Term Perspective

    I had almost every client call me during the initial stages of COVID when the markets dropped 35% in three weeks. I think the ones that didn't call were too shell-shocked. Anyway, I explained to them that it is important to think long-term and not get too emotional. The stock markets have come back from every single shock over the past 100 years. Whether it was World Wars, the tech wreck, or the global financial crisis, the markets always moved higher afterwards. While we have not had a global pandemic in approximately 100 years, I was confident that the market would overcome—which, of course, it did.

    Abe GottesmanInvestment Advisor and Portfolio Manager

    Remind Clients of Planned Volatility

    I approach financial planning by making sure that when I build a plan, I understand what will break it. I always consider what would happen if there was volatility in the market. So, when we encounter a volatile market, it is my job to remind the client that we planned for this situation. Markets go up and down, and the plan still works. It is not necessarily comfortable, but that is the price of being exposed to markets. Navigating a difficult period in the market looks like walking next to someone and providing context and confirmation that we planned for this situation.

    Jen Grant
    Jen GrantCertified Financial Planner (TM) and Wealth Manager, Perryman Financial Advisory, Inc.

    Implement Forward-Thinking Asset Protection

    Helping clients during tough market times requires a smart, forward-thinking approach. I remember a case with Sarah, a hardworking business owner who was suddenly facing a lawsuit that risked her business and savings. This shows how unpredictable business can be and why planning ahead is crucial.

    We used offshore trusts and banks to protect Sarah's assets, which has become more important as lawsuits increase and wealth grows. Offshore trusts are strong shields against legal threats, keeping assets safe from lawsuits.

    We started by understanding Sarah's legal risks and the changing landscape of asset protection, including new risks like digital assets and social media liabilities. Acting before problems arise is key. Good asset protection isn't just about protecting current wealth; it's about planning for the future and leaving a legacy.

    For Sarah, we set up an offshore trust in a safe location, such as the Cook Islands or Belize. These places make it hard for creditors to claim assets from the trust. This gave Sarah peace of mind and allowed her to focus on her business without worrying about losing everything to a lawsuit.

    This success shows how important smart asset protection planning is. With the right knowledge and tools, it's possible to handle tough market times and legal issues, keeping assets and legacies secure.

    Blake Harris
    Blake HarrisAttorney, Blake Harris Law

    Suggest Portfolio Diversification

    To navigate the choppy waters of a volatile market, financial advisors often suggest spreading investments across various asset classes, such as stocks, bonds, and real estate. This method, known as diversification, aims to reduce the impact of market dips, because not all sectors tend to fall at the same time. Diversification is a strategic approach to managing risk, relying on the idea that a portfolio composed of different kinds of investments will, on average, yield higher long-term returns and lower the risk of any individual holding or security.

    It's not about aiming for the highest gains in short periods but rather protecting against significant losses that can arise from having all one's eggs in one basket. If you haven't examined your portfolio diversity, consider seeking advice on how to ensure your investments are well-spread out.

    Increase Cash Holdings for Flexibility

    During times of market uncertainty, advisors might advise clients to build up their cash holdings. By increasing liquid assets, investors can take advantage of market corrections or downturns by purchasing stocks at lower prices, a strategy akin to sale shopping for valuable companies. Having cash on hand gives an investor the flexibility to act swiftly when opportunities arise, without the need to sell off other investments at potentially unfavorable times.

    Also, this strategy can offer a sense of security, knowing that not all resources are tied to unpredictable market movements. Assess your liquidity, and consider if you're positioned to act when the market presents an opportunity.

    Utilize Hedging as Market Insurance

    Financial advisors utilize hedging strategies as a form of insurance against market downturns. Hedging involves using financial instruments, like options or futures, to offset potential losses in investments. It is a more advanced technique that allows investors to maintain their positions in the market while mitigating the risk of significant losses.

    While hedging can protect an investment portfolio, it's important to understand that it may also limit potential gains. If you're curious about how hedging might benefit your investment strategy, now might be the time to learn more about these protective financial instruments.

    Maintain Goals with Portfolio Rebalancing

    Rebalancing is another strategy where investments are adjusted to keep a portfolio in line with the investor's goals and risk tolerance. Over time, some investments may grow faster than others, causing the original allocation to shift, potentially exposing the investor to more risk than intended. Advisors recommend reviewing and adjusting portfolios periodically to ensure that asset allocation does not drift significantly from one's initial investment strategy.

    Rebalancing can help maintain a steady course through market fluctuations and ensure one's investment objectives remain on target. Why not schedule a portfolio review to see if your investments align with your financial goals?

    Adopt Dollar-Cost Averaging Strategy

    Dollar-cost averaging is a simple yet effective tactic that advisors often promote during volatile periods. This involves consistently investing a fixed sum into the market at regular intervals, regardless of the share price, which can result in buying more shares when prices are low and fewer when prices are high. Over time, this can help reduce the average cost of shares and alleviate the pressure to time the market perfectly.

    It is a disciplined strategy that helps investors stick to their investment plan and can potentially smooth out the volatility in their portfolio. If market ups and downs concern you, adopting a dollar-cost averaging approach might just bring some consistency to your investment journey.