You’ve no doubt already formulated some kind of response to questions about what to do in the face of volatility. The advice we give you may not be a surprise to anyone well versed in planning, but seeing it repeated, we hope can help bolster your convictions and perhaps help polish your client responses.  

In short, volatility is not new, but we have enjoyed a period of relative calm that has left many investors, particularly anyone relatively new to investing, without a full understanding about what volatility means and actually looks like – until recently.  

Client behaviour 

“One of the most difficult things that we have to manage as advisors isn’t necessarily the market, it’s the behaviour of our clients. We understand what needs to be done, but conveying that message to the client, sometimes that can be difficult,” says certified financial planner (CFP) and principal of Dewdney & Co., Christopher Dewdney. “Each client needs to be handled on an individual basis.” 

Volatility, he says, is a good thing, a natural part of market investing, and something which should be embraced, particularly if the client in question has disposable income or additional capital to deploy. “It is natural, it’s healthy for markets and it is something that will always be there.” 

CFP, Jason Heath, of Objective Financial Partners Inc., adds that when investing in stocks or bonds, the results are not going to be a straight line, the way it might be if the client were invested in a GIC. “Volatility is definitely part of investing.” 

Market timing 

“It exists. It’s always present,” agrees vice president and advisor with Zavitz Insurance and Wealth, Justine Zavitz, who adds that market timing is another key piece to consider at times like this. “No one can time the markets,” she says. “We don’t know when the best time to buy or sell is, so we need to stick with the (financial) plan, knowing that volatility is there.” 

Regarding market timing, Heath points out that trying to time the markets presents about the same odds of success that might be had from flipping a coin. “Trying to pick the right time to sell, then the right time to buy back in, you need to be right, not just once, but twice. It’s very difficult to do. Generally speaking, when you look at a long period of time, the best outcomes are had by those who stay invested.” 

Volatility risk 

Interestingly, Zavitz says since 2008, a lot of collateral about volatility risk and how behaviour with a portfolio can dictate how an investor will do over time, has led to a higher level of awareness among most of her clientele. “I find, at the very least for my clients, most are very, very familiar with the fact that you don’t want to be selling at this point in time. It is terrifying to watch your portfolio go down and we all feel it, but the best thing to do is stay with it. I find that they all kind of inherently know that already,” she says. “I don’t know if that is (because) we have these discussions before we jump into these things or if they’re reading the same articles,” she adds, “but people are starting to understand a lot more how behaviour drives the market just as much as economic indicators drive the market.” 

Heath meanwhile says if people have been set up to understand volatility, they may be uncomfortable with the fact that their investments are down, but that they’re generally resigned to the fact that this is part of the long-term investing process. “The people I find that are most at risk in a time of volatility like this, are those who either weren’t prepared by their advisor about the upside and downside,” or they are those who are investing without advice. 

He adds that do-it-yourself investors have also enjoyed a reasonably good run over the past 10 years. Many, particularly those invested in riskier assets – smaller companies, technology stocks, meme stocks and cryptocurrency – are being taken by surprise by the volatility they’ve not experienced in the past. “It’s a bit of a lesson. You need to be diversified,” he says.  

“Hopefully people will be prepared for this, but not everybody will be,” he adds. “You don’t have to feel good about what’s happening right now, but you do need to know that it’s part of the investment process.” 

In reality, they say for those with a long-term time horizon of five years or more, it’s unlikely that investments will be lower if investments are left to recover from bouts of volatility. For those who are drawing from their investments, however, even withdrawing five per cent each year still leaves 95 per cent or more of their investments invested to benefit from a recovery. “Just be careful about any knee-jerk reactions, regardless of where you are,” says Heath, referring to the different reactions accumulating and decumulating clients might have.  

Zavitz points out that it helps to return to a client’s financial plan and point out what they need to be earning each year to make that plan work – if clients enjoyed substantial returns in one year, these generally offset years with more lackluster performance. “Perhaps as markets start to rebound, we should reconsider the risk questionnaire (with that client) and whether or not it’s still suitable,” she says. 

Heath agrees, saying clients should also maintain consistent discipline when it comes to asset allocation. If some clients today are invested in stocks because they’ve not been able to earn suitable returns from their fixed income portfolios, now might be the time to revisit that assumption and rebalance. “GICs are much more competitive now than they’ve been in 15 years,” he says.  

As for war, high interest rates and extremely high inflation, Dewdney points out that investors have gone through all of the above before. “Fundamentally, nothing has changed,” he says, echoing the sentiment expressed by all three advisors: “The most important thing is to stay calm and stick with the plan.”