Managing Money What to Ask Your Financial Advisor During Market Volatility

by Julie Anne Russell | November 05, 2020

When the inevitable ups and downs of the market hit the headlines — or your portfolio’s bottom line — even the calmest investor can lose a little sleep at night.

But feeling emotional about your money or the market is not necessarily a bad thing. Emotions around money are natural, and volatility in the market offers you a chance to learn more about the investing strategy that’s right for you.

“Your actual tolerance is really tested during times when the market is volatile,” says Chloe Moore, a financial advisor and founder of Financial Staples, a financial planning firm based in Atlanta, GA. “One of the greatest values a financial advisor has is acting as a behavior coach,” adds Moore. “A lot of times [investors] tend to make emotional decisions when the market is volatile, and a financial advisor can help you work through your emotions and make sure your behavior is in line with your goals."

So, how can you feel empowered to talk through your investment strategy even when the markets fluctuate? Following are seven key questions to ask a financial advisor to help guide you in making choices that are right for your portfolio, no matter what's happening in the market.

1. How can a financial advisor help me weather a volatile market?

First, you'll want to have a general financial checkup with an advisor. If you’re already working with a financial advisor, they may have created a financial plan that takes into account not just your investment strategy, but also your savings goals and budgeting. Some financial plans may also incorporate tax strategies and insurance.

“If you have a plan in place before the markets get volatile, it’s easier to stay on track,” says Moore. Such a plan will be matched to your savings, timeline to retirement and risk tolerance — meaning that it’s formulated to leave you feeling comfortable during a market downturn, but also poised to benefit from market rallies. Having a plan also helps you avoid risky moves such as trying to time the market or panic-selling.

“When it comes to investing I always tell my clients, 'Don’t read the headlines,' that’s number one,” says Jeff Feldman, owner of Rochester Financial Services, a wealth management firm in Rochester, NY. A financial advisor can also help make sense of sometimes confusing or contradictory economic indicators — say, for example, when unemployment is high but the stock market is rallying, or when pundits are advising you to sell, sell, sell or buy, buy, buy.

2. What are the pros and cons of a volatile market?

For every investor who sees doom and gloom in the news, there is another who sees opportunity — and, the truth is, either outcome is always possible. You can take advantage of buying stocks when prices are low (helping your investing dollars go further in acquiring assets), for example, and partake in a potential comeback. But you could also lose a percentage of your portfolio’s value, temporarily or permanently, in a downturn.

But perhaps the biggest risk of a volatile market may be that you abandon your plan entirely — and for no real reason. “A volatile market itself doesn’t warrant changes, but sometimes people feel like they need to do something,” says Moore. “And they might make a decision they regret.”

This is where your financial advisor steps in. With their help, you can stick to an investment strategy that is individualized for you without having to worry about or reacting to every fluctuation in the market. “It’s very hard, but you really have to avoid listening to your gut sometimes,” says Feldman.

3. How can I keep calm about my investments when the market is in flux?

One way to sleep well even during market volatility is to work with your financial advisor to run various scenarios about your portfolio’s performance. That way, you avoid jeopardizing your timelines for your goals but you’re also poised to get the returns you want to hit those goals.

“Let’s say you’re a couple with $100,000, and in five years you need $120,000 to buy a house. What kind of risk are you comfortable with for that money, and what kind of volatility would you be comfortable with?” Feldman asks.

One way to analyze your tolerance for risk is to consider the standard deviation, that is, the variation from the original value, for different investment options, he says. A bond mutual fund, for example, might average a 3% return in a five-year period; but with a standard deviation of plus or minus 3 percentage points, you could get a 6% return on your money — or no upside at all. Running through specific scenarios with your advisor can help you avoid overreacting to market volatility, simply because you’ve planned for every possibility.

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4. What if I do want to change my investing strategy in response to market volatility?

If you’ve balanced your portfolio to focus on your long-term goals, the common wisdom goes that you should be able to stay the course during market volatility. And that may very well be true. But if your emotions are telling you that your strategy simply isn’t working, a financial advisor might help you adapt your plan accordingly.

“Hopefully you would have insulated your portfolio by going through scenarios beforehand,” says Feldman. “But if you didn’t, and you can’t sleep at night because you’re concerned about your losses, there’s nothing wrong with getting defensive and taking risk out of your portfolio.”

If, on the other hand, you are ready to invest more, be wary of trying to time the market. “If you have extra money that you can put into the market, invest a little bit each month using dollar cost averaging, rather than taking a big chunk and trying to decide when to go in,” Moore advises.

Dollar cost averaging, a tenet of systematic investing, is simpler than it sounds: it’s essentially the strategy a 401(k) plan uses, where a set amount of money is invested each month, regardless of the market’s performance. That way, you’re focused on long-term performance, not short-term ups and downs.

5. But, with all this uncertainty, should I even be investing now? 

Investing in a volatile market is less about the condition of the market and more about whether you’re in a financial position to invest at all, experts say. Because as exciting as it is to jump into an investment and see your money grow quickly during a rally, if you don’t have some financial safeguards in place, a downturn could be costly.

Before investing, your financial advisor may suggest you hit some goals. “An emergency fund is a top priority, as well as paying off high-interest consumer debt,” says Moore. A long-held rule of thumb is that an emergency fund should hold three to six months of living expenses (though some financial experts as of late have adopted the view that socking away upward of a year’s worth of spending money is smart). Moore also recommends raising your 401(k) contribution to max out what your employer will match.

“Understand what is investable money and what’s not,” says Feldman. “Don’t invest your emergency reserve. You might need that money to take a course for your career, save for a house — or to pay your rent.”

An individual who has a sizable amount of savings and income, however, and who is looking for greater returns, might take the opportunity to invest. “When the markets are down, if you have extra money just sitting in cash, and you’ve funded short-term goals, it really is a good opportunity to put some money to work,” says Moore.

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Understand what is investable money and what’s not.
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6.  Is my investment mix right for these market conditions?

“The most important thing a financial advisor can do to help get their client through a volatile market is to make sure the client has appropriate asset allocation ahead of time,” says Feldman. Your portfolio should be diversified in a way that will help meet your long-term goals. Consider how the mix of stocks, bonds and short-term investments matches up to your risk tolerance, that is, your comfort level to weather the ups and downs of the markets, and your timeline to and through retirement.

But even if you’ve had a negative experience in a volatile market, you can use that experience as a cue to rebalance your portfolio — whether to provide more opportunity to grow your money or lessen your exposure to losses. (Rebalancing your portfolio periodically may also be advisable in order to maintain a target investment mix over time.) 

“If your entire portfolio is subject to large swings, you might not be as diversified as you thought you were,” Moore says. Other products, such as fixed annuities (a form of insurance that provides a fixed income) or U.S. Treasury securities, may provide the level of risk you're looking for, or help balance your overall portfolio, particularly when you're closer to retirement or already retired.

7. How should my goals affect how I invest?

Whether or not you want to expose your money to market volatility will depend on the specific timeline for the goal that you have attached to that money.

For money you need in three to five years, you might consider a CD or money market account to be more sensible. But for money that you don’t plan to spend for 10 years or more, those are funds that could be in the market, Moore suggests. Either way, with your funds in the appropriate places for your goals — and being mindful of when you want to reach them — you can focus less on day to day results and hone in on your long-term plans.

“Over time, market volatility does happen, but just maintain that long-term focus to help you keep a level head,” says Moore. “Remember that market volatility and uncertainty is uncomfortable in the short term, but don’t let it drive you to make emotional decisions you might regret in the long term.”

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Over time, market volatility does happen, but just maintain that long-term focus to help you keep a level head.
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Instead, by using those emotions as a bellwether and working with your financial advisor, you can find a strategy that keeps you invested in what matters most: your secure financial future.

Investing Success Tips Finance 101
Julie Anne Russell

is a Brooklyn-based freelance journalist. She writes on personal finance, small business travel and more.

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