Concerns over market volatility are on the rise. According to McKinsey, a survey conducted at the end of March 2023 showed respondents were more than twice as likely (31%) to cite market volatility as a top global risk as they were just a few weeks prior, in early March (15%). And for the first time since March 2019, volatile financial markets ranked within the top three risks to global growth.¹
With another bank takeover in the news, investors are undoubtedly on edge. And for wealthy clients in the market, volatility can be a significant worry.
Behavioral finance experts warn that emotions can dominate decisions during moments of distress, such as volatile markets. When clients fixate on the short-term risks instead of maintaining their long-term perspective, they are at risk for making irrational financial decisions.
When the markets are uncertain, investors, especially those in the high net worth space, should take stock of how they are adhering to investing basics. Here are six strategies to stay prepared:
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1. Stay diversified.
Professional investment managers know that diversification — investing across stocks, bonds, cash, and other asset categories — can help reduce volatility within a portfolio over the long-term. Generally, equities and fixed income respond to market conditions in opposite directions so losses in one area tend to mean gains in other areas, helping to smooth out sharp swings.
2. Pay attention to asset allocation.
Particularly for high-net-worth investors, how assets are allocated can significantly drive the risk/reward profile of their portfolio. Advisors and their clients can work together to identify the right target allocation ranges for different asset classes, depending on a client’s specific goals, time horizon and risk tolerances. Portfolio managers manage holdings to remain within those parameters and can also help ensure that portfolios are rebalanced regularly to maintain ranges.
3. Dollar cost average.
Dollar cost averaging (DCA) simply means investing a fixed dollar amount into an asset on a regular basis, regardless of the share price of that asset. During volatile markets, over time, DCA can potentially help lower your costs by buying shares at lower prices when the market is down. If you always invest a set dollar amount each month, when the market is up and prices are higher, you’ll be buying less shares with your money. When the market is down and prices are lower, you can buy more shares. DCA also helps investors to develop disciplined investing habits, by setting aside a set amount of money to invest on a regular basis.
4. Don’t rely on the herd.
Herd mentality is when clients follow the investment actions of others. To invest simply because others are investing in something can lead to disastrous results unless clients work with their advisor to do their own research and analysis. One example of herd mentality is when a market event — the collapse of a bank, for example — sets off a massive sell-off and market correction unfolds. Savvy investors stay the course and wait it out. While it can be difficult to sit and wait, selling as the price drops could result in locking in a permanent loss. On the flip side, following the herd into an asset, when it’s trending and the price is inflated, means buying an overpriced investment.
5. Maintain a long-term view.
Market timing is based on price volatility and the goal is to turn predictions into profit by timing and executing purchases and sales before the market does. Consider the data:
- Model portfolios over a 30-year period could underperform by nearly half their value through market timing.²
- Market timers who miss just 10 days in the market could lose up to half the value of their portfolio.²
Investors who try to time the market may end up with a few success stories but over the long-term, it’s not a viable strategy for success. High-net-worth individuals understand that investing is a long game and use their advisor and other financial tools to analyze investment moves.
6. Partner with a modern TAMP.
Advisors who partner with a tech-enabled TAMP, like Orion, can leverage the team of specialists to help attract and win high-net-worth clients with personalized wealth experiences. Feel confident during times of market volatility with tailored portfolios, dedicated client portfolio managers, additional wealth services, and high-touch support.
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¹Source: Economic conditions outlook during turbulent times, March 2023, McKinsey & Company, April 28, 2023
²Source: Just Accept It, You Can’t Time the Market: Do This Instead During Market Volatility, Smartasset, August 2022
³Source: 2023 America’s Best TAMPs – Best Technology and Best Model Market Marketplace.