How to deal with market volatility

There are few things in life that are certain - death and taxes are the top two certainties, but so is market volatility. As a financial adviser, you can be assured that all your clients will have to deal with market volatility at one point or another on their investment journey. Your role is to make sure that they remain focused on their long-term goals, while their investment strategy ensures they are able to achieve both capital protection and growth.

What is market volatility? In a nutshell, it is the way the markets move up and down, and the degree of deviation from expectations. While it is only natural that the markets would exhibit volatility over the short term, investors tend to react poorly by panicking and selling out of their investment at a low point. This goes directly against the sage advice of renowned investment guru, Warren Buffett, who says the key to investing is to buy low and sell high. This means that rather than going with the knee-jerk reaction of selling out of the market when it is crashing, the wise investor should view this as a window of opportunity and should be investing more if they have cash available to do so.

Financial advisers play a key role in terms of cautioning the nervous investor to stay calm and focused on their long-term investment strategy. However, this is often easier said than done. Clients need to be reassured that their investment strategy is for the long term, and that they should ignore short- to medium-term market moves because this will correct over the long term. While emotional bias is a factor that must be contended with, there are practical ways to build an investment portfolio so that you can address market volatility and ensure optimal outcomes.

The most basic tool is diversification, which means that clients are invested in different types of assets. For example, they may be invested in equity, bonds, property and cash. So, even if the market (equities) is underperforming, his portfolio may be seeing growth in another asset class, such as property. This ensures that his capital is protected against losses, and increases the potential for capital growth. While factors such as inflation, interest rates and political events are out of a client's control, they can control the amount of diversification in their portfolios, how much they choose to save and the timeline of their investment.

Another golden rule from Buffett that clients would do well to remember is, "If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes." Fund managers invest a great deal of time and energy on extensive research and monitoring processes before they select stocks.

This article should not be taken as financial advice and is meant for information purposes only.

Discovery Life Investment Services Pty (Ltd), branded as Discovery Invest, is an authorised financial services provider. Registration number 2007/005969/07.