Sudden market volatility has advisers preaching calm to newer investors

With the major stock market indexes all heading south since the start of the year, financial advisers are mostly telling clients to sit tight and ride out what is an inevitable reality of investing. But with volatility hovering at levels not seen since the start of the global pandemic two years ago, inflation hitting a 40-year high, the Fed signaling higher interest rates and geopolitical risks heating up, conversations with clients can go in any number of directions.

“There’s always a percentage of clients who get nervous, but we’re just telling them that this kind of volatility is normal; what happened last year, when there were no major market pullbacks, was not normal,” said Blair duQuesnay, investment adviser representative at Ritholtz Wealth Management.

The abrupt market pullback in January, which has the S&P 500 Index down more than 8%, the Russell 3000 Index down more than 10%, and the Nasdaq Composite Index down more than 12%, could just be a repeat of March 2020, when stocks went down fast and recovered almost as quickly.

But as optimistic as advisers like duQuesnay try to be, there's no denying the global pandemic wasn't in anyone’s forecast two years ago, in contrast to the current economic landscape, which is littered with reasons for shaky markets.

“Every time the market starts to rumble, we address what the narrative might be and this time that’s inflation, the Fed and geopolitical tensions,” duQuesnay said. “But what we should be worried about is the things we don’t know.”

Even with that state of mind, duQuesnay said advisers at Ritholtz remind clients to stick with the plan that was in place before the markets got choppy.

“We have a plan we make before the market sells off, so we’re executing the plan we already have in place,” she said. “Rebalance if needed, looking to strategically to move out of concentration risks in a tax-efficient manner, and tax-loss harvesting.”

Focusing on the plan is key, especially for younger and less-experienced investors, said Andrew Guillette, vice president of Americas Insights at Broadridge.

According to a Broadridge survey of investors in November, 49% of those with a formal financial plan felt better about their financial situation compared to 12 months earlier, versus the 22% of investors without a formal plan who felt better.

Also, 78% of investors with a formal financial plan reported a positive outlook about their personal financial situation over the year ahead, compared to the 44% without a plan who felt the same way.

Acknowledging that the survey was conducted prior to the recent market volatility, Guillette said the same survey today would likely produce different results. But the point remains that financial advisers play a crucial role in guiding investors who might not have a lot of experience with market corrections.

“Having an adviser and a plan is somewhat of a calming effect,” Guillette said.

Broadridge’s research on the democratization of investing found that between 2017 and 2020, the mass market of investors with less than $100,000 worth of investible assets grew to 38% of all investors, up from 30%.

“You have an influx of new investors that haven’t seen these kinds of cycle, and they’re now getting exposure to volatility,” Guillette said. “With democratization comes a responsibility to help educate, support and communicate frequently with the kind of statistics showing the decades of investing behind us.”

Paul Schatz, president of Heritage Capital, said the year is shaping up pretty much in stride with his outlook for the first quarter, which included a “single-digit decline” by the S&P.

“So far, the markets are performing almost exactly as I had laid out in my 2022 forecast,” he said, adding that his advice was to “heavily underweight or ignore mega-cap technology, look for a bond market bottom in the first quarter, and gold gets loved again.”

The price of gold, as tracked by the SPDR Gold Shares ETF (GLD), is up about 1% from the start of the year, reigniting age-old debates over whether gold and other precious metals are smart hedges against inflation and market volatility in general.

“The gold bottom is in; buy any and all weaknesses,” Schatz said. “This year will be about patience, frustration of both bull and bear, and quality. Own quality everywhere.”

Hans-Christian Winkler, founder of Winkler Wealth, is also in the camp that sees precious metals as a smart go-to move at this point in the economic cycle.

“Both gold and silver make sense and should have been in clients’ portfolios already in the last 12 months,” he said. “Precious metals are some of the most overlooked areas and a 10% to 20% representation would be warranted.”

Winkler’s justification for gold now is pegged to inflation and soaring government debt levels.

“The Fed will have a hard time getting inflation and the debt under control and it will only be a matter of time before precious metals start to shine and enter a bull market,” he said.

Meanwhile, Tim Holsworth, president of AHP Financial Services, believes “doing nothing is the right thing right now,” even though he sees a “fantastic lack of confidence in the White House” and expects the midterm elections to reflect that.

“We’ve had a couple of big years and we’re way overdue for a correction,” he said.

While Holsworth said he isn’t making any drastic portfolio changes as a result of the recent volatility, he is sticking to his strategy of mostly avoiding bonds because “yields will be low or nonexistent for the next several years.”

Even for clients in or near retirement, Holsworth has little use for traditional allocations to 30% or more in fixed income, although he has gotten creative by turning to indexed annuities and even using municipal bonds inside qualified retirement accounts for yield.

“It’s not easy,” he said. “We’re still going to have bonds. It’s a necessary evil, but we try to be really careful about what bonds we use.”