Market Volatility Requires a Risk Management Strategy

We experienced another enormous market swoon this week; as reported by various media, the Dow Jones Industrial Average (DJIA) dropped almost 1100 points on Monday, charting the largest ever drop in the markets and closing 600 points down in its worst trading day since 2011.

Once again, investors are nervous. What lessons can we learn from other major financial events and how can advisors help their clients regain their sea legs as we weather the current storm together?

The Dow Jones Industrial Average (DJIA), a proxy for the U.S. equities market, tells us that the average annual growth rate from October 7, 1896, the first date for which annualized growth rates are published, until mid-August 2011, was 5.34%. However, depending on when you entered and exited the market, annual growth rates could swing from 3.88% to 17.17%, even over long investment horizons. These returns are, of course, before taxes, inflation and the costs of investing. But still, that is quite the range, determined by something as happenstance as when you entered and exited the market.

So, unless you have a crystal ball, you really can’t bet the farm on what the market is going to do in this latest round of corrections. Instead, what's required is a shift in focus to a framework for long term thinking about family investment results.

At Knowledge Bureau, a disciplined Real Wealth Management™ approach is taught as a framework for the discussions advisors need to have with their clients in order to better measure and manage risk - before and after taxes - and create financial stability for the long term.

The role of a designated Real Wealth Manager™  is to ensure that investment solutions align with long term financial objectives in a carefully constructed wealth-management plan, which has four primary pillars of activity, that are initiated with trigger questions that really matter to the client.  It ensures that both advisors and clients are accountable for all decisions, and that's important in volatile times when one may wish to stay while the other wishes to sell or invest.

This approach is also powerful because it enables advisors and clients to choose investment-product solutions carefully and purposefully, according to defined benchmarks within the primary pillars: accumulation, growth, preservation and transition of the family’s wealth.  Sustainability of wealth includes a focus on taxes, inflation/deflation and fees using economic forecasts at everyone's disposal.

Especially in volatile times, these forecasts provide glimpses - albeit narrow at times - into the future.  Even if the horizon is marred by volatility, this strategic planning approach allows clients to plan spending and savings decisions based on what is known, rather than guessing on the unknown.

Because there are numerous skillsets required to execute a Real Wealth Management strategy properly — tax, investment and retirement-income planning, business, succession and estate planning — it requires a multiple-advisor, interdisciplinary approach.

Accountants, lawyers, insurance and investment advisors all need to be working together to deliver solutions specific to the economic, financial and life events the client is facing. Each professional advisor brings deeper knowledge of his or her specialized discipline to the table.

Can the average person put together this Real Wealth Management dream team? The short answer is “No.” But one highly trained and trusted advisor can assemble, monitor and manage the entire team to the plan—an incredible value proposition for the worried family.

A graduate of the MFA Designation programs offered by Knowledge Bureau has been trained to develop such a holistic plan and manage it. For more information visit the designation course description pages on the Knowledge Bureau website.
 

ⁱReal Wealth Managers are designates of Knowledge Bureau’s Master Financial Advisor (MFA) Programs.