How Good Advisers Manage Risk in Challenging Markets

A financial adviser smiles and shakes hands with a new client.

Why are down markets challenging? And do they always need to be?

A portfolio manager knows every market has down days, and every portfolio will at times underperform. The real challenge comes when an investor’s investing strategy is consistently out of sync with their long-term goals.

For example, if the S&P 500 plunges 1,000 points (as it has done multiple times recently), or a hype bubble pops, it shouldn’t matter for a conservative portfolio made to protect against downside risk. If the strategy does its job, all is well. If not, portfolio managers review the underlying facts and decide if we should adjust.

Disciplined portfolio managers don’t try to outsmart the market. We rely on data to keep the right level of risk in our investment strategies, based on what the aim is for those strategies. And managing risk is the name of the game.

Hope and fear are not investment strategies

In a perfect world, people would make investment decisions rooted in data and discipline. But we are human, and people do make choices with their money based on emotions like hope and fear.

The problem is that hope and fear are not investment strategies. A concentrated stock position or an investment into a hyped-up asset on a tip from a friend is like saying, “I hope I’m right.”

And even if their hopes are well-founded, history shows that investors are not great at sticking to those hopes. Dalbar’s latest Quantitative Analysis of Investor Behavior finds that investors hold on to a portfolio for an average of only 3.7 years before switching.

That is not enough time to achieve long-term financial goals. This is where a disciplined adviser or investment manager can make a meaningful difference.

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The most successful advisers we work with at NewSquare Capital, an investment advisory firm based in Newtown Square, Pa., are the ones who can consistently steer their clients back to an investing strategy based on facts.

When fear or greed causes investors to lose sight of their long-term plan, sound advisers bring them back to earth by asking, Has anything really changed from your original, well-thought-out investment approach?

Moments of clarity

I have seen this question lead to moments of clarity as the investor realizes that there is more to investing than getting wrapped up in the latest market story, crossing their fingers and hoping for the best. From there, constructive conversations about appropriate strategy and methodology can take place.

Good advisers, in our experience, understand the differences between what might be real challenges to an investor’s strategy or just fear brought on by market volatility. The latter is natural.

A fact-based strategy doesn’t discount investor emotion outright. Instead, the goal is to take a step back and gently set those emotions aside, only weaving them into the plan if they are truly warranted — which is uncommon during fearful periods of volatility like now.