Managing clients through the inevitable return of volatility

The year 2021 saw an almost complete lack of stock market volatility. This was despite continued uncertainty around the pandemic and its effect on the global economy.


With a drawdown of only 5% in the world’s premier index, the S&P500, 2021 conveyed the message that market returns are easy to come by with minimal downside movements. Unfortunately, the age-old lesson that one cannot have market returns without enduring volatility may have been forgotten by many. Volatility is something only cryptocurrency speculators had to deal with!

While it gave most advisors an easier year (and didn’t we need it!) we need to make sure we don’t become complacent in preparing our clients for the inevitable return of “temporary market declines”.

I am a firm believer in Nick Murray’s view that 80% of our value is in helping clients to stick to the plan we’ve helped them to develop. Being a few steps ahead of the next battle is a great way to stop your clients from blowing up their plans. Based on what we saw in 2021, I think our next battle is easy to spot.

It’s hardly going out on a limb to predict that this year will see the return of more substantial volatility. Bring it on I say, the behavioural advisor shines during the tough times. With increased inflation now a reality in the developed world, fresh concerns about geopolitical conflict and midterm elections in the US, the possible triggers for market volatility are many.

Already we have seen a deep decline in January, wiping out a large portion of last year’s gains. This has unfortunately surprised a few “investors”. But this is what the market does and will continue to do.

Before we can be useful to our clients, we first need to internalise the truths of market corrections. We need to understand how they fit into the arc of market history so that we can simply and effectively coach clients to see these events for what they are, an opportunity to “earn” the returns that come from behaving like a grown-up during uncertain times.

Knowing that it’s not “different this time” is a prerequisite for explaining to a distressed client why “losing” a few years of retirement income is not something they should be concerned about. And of course, for our clients who are still saving, a decline is a gift from heaven! You are buying units at knockdown prices. Best of all is being able to demonstrate with a robust cash flow planning tool that their lifetime plan succeeds in spite of the current declines.

Many of these things are easier said than done, but this is the life we’ve chosen. Every challenge is another opportunity to help our clients behave their way to wealth rather than misbehave their way to poverty.

So, as we head into a new year that will bring fresh challenges and opportunities, what processes do you have in place to prepare your clients for the rhythm of the markets?

Andy Hart, Humans Under Management

A robust client onboarding and review process will form the backbone of how you educate clients, but carefully selected and simplified market data can be useful in helping them to understand the fundamental behaviours required to become successful investors.

Do you (and your clients) understand the average intra-year decline, the frequency of bear markets, the proportion of positive return years, and the probability of capital loss over different periods?

While this data is important and can be useful in explaining core concepts, what they need more than all of this is you. They need you to be confident in what you believe and what you’re advising them to do. The messenger is the message, as they say. The financial advisor is the last line of defence.

Are you ready to be the advisor they deserve?