Preparing for Market Volatility Scares: 3 Strategies

Investing in the equity markets is kind of like entering a haunted house.

You tread lightly, understanding that an unknown and unexpected scare could lurk right around the corner.

At any moment, something could potentially jump out and frighten you.

So you mentally prepare yourself. You expect surprises, but when they occur, you still scream. (OK, maybe not literally, as far as the markets are concerned.)

Yet we are all human and, when scared, our natural reactions may take over.

This scenario is like when the markets experience volatility. Volatile markets are not new and should be anticipated.

Preparing for the highs and lows is part of a financial professional's job — but it is the down times that understandably scare clients.

A feeling of unrest can lead them to adjust their investments.

While we can't eliminate human bias, financial professionals can use a few key strategies to mitigate some of these natural human reactions.

3 Tips to Navigate Market Volatility

Helping clients create a long-term financial strategy that builds confidence and helps remove emotional decision-making is a crucial way to address market volatility worries.

Here are some ways to do that.

1. Highlight the value of a long-term financial plan.

As financial professionals, one way to help clients feel confident is by ensuring they understand their plan.

A sudden financial shock can feel like the world is crumbling around them.

To help minimize this shock, try to get clients to be in a long-term frame of mind.

Ask a question like, "Would your 10-year-older self approve of this decision?"

During times of market volatility, clients may feel a sense of panic and can forget the strategy they had initially created and committed to following.

As you guide their financial plan, talk to them about the possibility of different market cycles and the financial shocks that could realistically occur.

Help them understand that these scenarios can be normal and — as part of their overall financial strategy — you can help them account for potential downturns and plan for volatility.

2. Communicate, communicate, communicate.

Talk with clients about economic downturns and how you've worked together to build a long-term plan to meet their goals.

Communicating that a plan is in place can help reduce stress.

Less stressed clients will generally make less emotional decisions.

3. Talk about volatility control strategies.

And, finally, discuss how various volatility control strategies work.

It's important to take the time to educate your clients on different ways they can manage volatility, because market surprises are a matter of "when" rather than "if." Knowing how to address these unexpected changes without drastically changing course can make a big impact.

Strategies to Discuss

Here are some ideas clients might want to consider:

Dollar-cost averaging: This strategy, which involves slowly putting money into the market over a specified period of time, can control the impact of volatility as it eases clients into the market.

Clients can lessen the psychological shock if the market drops immediately after they invest.

This helps mitigate initial loss aversion bias and keeps clients focused on the long-term plan instead of the short-term volatility.

A diversified portfolio. One of the easiest ways to manage market volatility is to use many different asset classes, money managers and investment styles.

Annuities: Index annuities can offer features designed to help manage the market's downside while providing opportunities for market growth.

Annuities, or riders that provide consistent income streams for retirement, can help clients feel at ease knowing that their income will not be adversely affected by a market downturn.

Helping clients become market smart is like turning on the light in a dark room.

Just like walking through a haunted house, things are less scary if you can see and anticipate what lies ahead.

Having a financial plan in place and standing ready to help can make all the difference to reduce these natural, uneasy feelings of uncertainty.

Tyler De Haan is director of advanced sales at Sammons Institutional Group.