Showcased by gains in the S&P 500 for all twelve months, 2017 was the least volatile year in the stock market since at least 1986. On the flip side, 2018 has not been so kind as evidenced by two 10% declines for the S&P 500 already this year. With this sort of stomach-churning volatility, the question “What should I do?” is broached with our clients nearly every day. The answer is itself a question, “Well, has anything in your personal situation changed?”
The most important conversation we have with our clients is one of the first ones we have and centers around the topic of how much risk can Mr. and Mrs. Smith take? The risk-assessment dialogue has two inherent parts: how much risk can you take and then how much risk are you willing to take. The ability to take risk and the willingness to take risk are two different facets of this conversation.
Generally speaking, volatility is good for investors that are looking to grow their assets – volatility provides the opportunity to purchase assets more cheaply provided the investor has time to wait for the recovery. For those that are looking to protect their assets, volatility is seen as a disadvantage because the declines in asset prices might be too great to recover from given the investor’s time frame.
In our view, stock market volatility provides an additional opportunity to the one mentioned above: the opportunity to demonstrate why we take such great care in our risk assessment of each client. So if the client responds that nothing in their personal situation has changed, we advise them to sit tight because we are already prepared for these times.