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Why Volatility is on the Upswing

By Crucial Clips     November 7, 2018
The following text is a transcript of a portion of a speaker's presentation made at an industry conference or during an interview. This transcript solely represents the view of the individual who spoke, and not the view of Financial Advisor IQ or any other group.
Source: FA-IQ, Jun. 15, 2018 

GARRETT KEYES, REPORTER, FINANCIAL ADVISOR IQ: Hi, my name's Garrett Keyes. I'm a reporter for Financial Advisor IQ. And I'm here today with Rich Steinberg, managing director and partner of HSW Advisors. Going forward, do you think volatility is set to increase in the market, or do you think that's going to become an issue more so than in the past?

RICHARD STEINBERG, MANAGING DIRECTOR, PARTNER, HSW ADVISORS: I think if you look at the most recent history, yes, I expect volatility to be higher than last year. That's not saying much, because last year was probably the historic low in volatility. So yes, I do think you're going to experience some incremental volatility. And it may feel worse because you're coming off of a period that was so benign. I think certain things, like the Federal Reserve raising interest rates, the European Central Bank ultimately tapering and exiting quantitative easing-- those types of things will tend to create more volatility as central banks start to remove some of this tremendous stimulus they've put into the system over the past eight to 10 years.

So yes, I do expect that. Geopolitical events are leading to some volatility as well. It's a little bit more volatile environment than we've seen before. And so I think it's appropriate to expect that, and I think you're seeing that. Now, that doesn't mean we're going back to 2008 and 2009. But yeah, we talk about that with clients. We tell them to anticipate incremental volatility and that we recognize why it's here, and it doesn't ultimately concern us that greatly.

GARRETT KEYES: Since volatility can swing markets between lows and highs, how do you deal with clients coming to you when markets are at their high, trying to put more risk in their portfolio or trying to change their investments? What do you do to guide them through that situation?

RICHARD STEINBERG: It's always important to listen to clients. And that's what we do. And again, it's always interesting to me, especially if you've been doing this for a while, as I have, that no one wants to touch anything when they're down. But after they've rallied a lot, everybody's willing to put on more risk and buy things. And so I think you listen to the client. You remind them about where they're positioned, why they're positioned that way. If, for instance, there is an opportunity to put more risk in their portfolio, that's appropriate, and that's a conversation to have.

But what we've seen over time is at market highs, everybody wants to buy, and at market lows everybody wants to sell. I mean, that's traditionally what retail investors get wrong. And so what we try to do is be much less emotional, remind, as I say, the client what this portfolio is about, the time frame they have to invest, the reason we've got certain aspects of the portfolio the way they are, and that we think we're positioned pretty well. Ultimately, at the end of the day, it's a client's money, so we are going to do what they want us to do. But we will make sure that we provide our input as to whether we think that's a good idea or not.

GARRETT KEYES: Can it be difficult to balance your input as well as what the client's asking you? Is it a difficult balance acting in their best interest but also listening to their suggestions?

RICHARD STEINBERG: It's never difficult acting in their best interest. It's always the right thing to do. Having said that, yes. I mean, when it comes to money, it's always emotional, right? It's very emotional. And so you need to understand that. And when the market's going down, and people look at their account, and they see the values going down, and you hear all the chirping on CNBC and places like that, it's telling them to turn off the TV. Go outside. Business is still occurring. People are still enjoying themselves, that kind of thing.

And when you get to more market tops, and people are feeling like, oh, I've missed something, and I want to get in, well, you haven't missed something. I mean, typically we're participating in that upside. We're not 100% in equity, so you're not participating fully, but the key is you won't participate fully when they go down. And so, again, it's reminding them about that all-weather nature to the portfolio that we like to create, because we want them to have a more predictable, consistent outcome in a world that does throw turbulence at you.

GARRETT KEYES: Do you have any words of wisdom for advisors who have been used to calmer markets looking ahead towards a time where things might be a little different? Do you have any advice to them on how to prepare for, I guess, clients maybe becoming a little more concerned or a little worried?

RICHARD STEINBERG: Listen, I would say it's to do what you have done and have been trained to do, which is you always put your client's interests first. Listen to your clients. Understand what their critical objectives are. And if you make those objectives happen, then you'll be able to ride out periods of turbulence and volatility. I don't think it's rocket science here.

I really think that with the various tools that everybody has, technology and the fact that information is so easily accessible these days, that you can really construct portfolios that speak to who that person is, that client is, and so that when you get into periods that are more difficult -- and typically, that means declining stock markets -- they recognize that there's a plan in place, that that is not a surprising event that markets can go down -- they can, didn't feel like that last year, but they can -- and that they recognize, typically, that if they've got the right time frame, which is long term.

I mean, we don't think about things in the terms of three weeks or six weeks. We're thinking about things in five years, 10 years, 20 years. When you think about it that way, you realize that the turbulence today is really going to be a hard-to-find blip on a long-term stock chart.

GARRETT KEYES: Great. Well, thanks for coming in and speaking with me today.

RICHARD STEINBERG: My pleasure. Great to meet you.