Insights

When Market Volatility Becomes a Relationship-Building Opportunity

Market volatility can trigger knee-jerk reactions that are best avoided by long-term investors.

Two client types in particular are vulnerable to overreacting to the sharp downturn: Millennials and Boomers.

A goals-based approach helps clients avoid counterproductive behaviors and pursue their financial goals with confidence, even in stressed markets.


The recent broad market sell-off has been sharp and swift, fueled by uncertainty around the economic impact of the coronavirus disease (COVID-19). Investors have turned to safe-haven assets, as market sentiment has shifted to a global risk-off environment. This may be intensified in the coming months along with uncertainty around earnings season and the US elections, not to mention the break-neck speed of our news cycle. We can help clients manage the risk of emotionally driven investment decisions by protecting against cognitive bias and by keeping a laser focus on long-term financial goals.

The market’s short-term memory
Market downturns are unsettling. Looking back at the market volatility of early 2019 may help to keep things in perspective today. Investors were nervous, coming off of a rough fourth quarter that gave back solid returns from earlier in the year. Headlines like “head-spinning,” “jaw-dropping,” and “worst-ever,” made it easy to get caught up in the fear of a major correction. However, investors who sold stocks in January missed the market rebound; the S&P 500 ended the year with an annualized total return of over 30%1. This is an important message for clients who are vulnerable to selling on the dip — trying to time the market usually comes at a cost.

Two client types in particular may be vulnerable to counterproductive investment decisions: Millennials and Boomers. For Millennials who started investing after the financial crisis, anything other than a bull market may be distressing. Whether they see a market downturn as a time to buy and hold, or they fall victim to chasing returns, may depend on moving away from a benchmark-oriented view.

Boomers, on the other hand, may be more concerned about their sequence of returns risk. The timing of performance dips matters a great deal for clients close to or in retirement, with few or no income-earning years left to make up for losses. Instead of trying to time the markets, maintaining an equity glide path that gradually reduces market risk through retirement can help defend against emotionally charged decisions.

For all investors, the key is to balance investment risk with opportunity risk in a way that reflects their capacity for total risk and their feelings about volatility. Especially during stressed markets, we can help investors by emphasizing portfolio diversification with regular rebalancing.

Redefining the value of advice
When expectations are upended during a time of market volatility, clients are likely to consider making changes. But a goals-based approach should help them make better decisions. The outcome orientation can add guardrails and remind clients of their reasons for investing. We know that irrational behavior is commonplace, even among the smartest investors. Market stress makes it even more difficult to stay the course — this is precisely when the advisor’s role in emotional governance is critical to long-term success.

Risk is not just volatility; a goals-based approach might yield a very different perspective. A few practical applications can help clients mindfully link risk to their goals, time horizon, and life stage, to take full advantage of the value that portfolio construction can bring to their investments.

Volatility and market downturns are inevitable, so they shouldn’t undermine good long-term strategy. But avoiding emotionally based decisions is easier said than done. Helping to manage counterproductive biases and behaviors is where the advisor truly adds value and deepens relationships over the long term.

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