FA Insights is a daily newsletter from Business Insider that delivers the top news and commentary for financial advisers.
Don’t Freak Out, The Recent Volatility Is Normal (Charles Schwab)
Everyone’s been talking about the recent spike in market volatility. However, it’s nothing to worry about, and it isn’t unique.
“Corrections are normal in bull markets and we have gone without one for an extended period,” write Liz Ann Sonders, Brad Sorensen, and Jeffrey Kleintop.
The volatility might continue in the short-run, but Charles Schwab analysts believe that equity-investors should focus on the long-term picture instead. Right now, they believe that the long-term picture is positive because the US economy is improving and monetary policy remains “quite loose.” Additionally, Charles Schwab analysts recommend diversifying portfolios with emerging markets.
Wealthy Executives Need Help With Their Own Finances (Financial Planning)
“Just because your clients are successful executives doesn’t mean they understand their own finances,” writes Andrew Pavia.
There are three major things to keep in mind. First, advisers should create liquidity for executive clients with the sale of restricted stock. Second, advisers should hedge and diversify their portfolios, and employ strategies “allow clients to minimize downside risk and defer tax consequences,” says John Neresian.
Lastly, advisers should have a conversation about charitable giving with their clients as well. Many clients are wealthier today than several years ago and may have unrealized capital gains they want to bequeath in a tax-efficient way.
Advisors Were A Force Behind The Recent Market Sell-Off (Investment News)
Advisors “played a role” in the recent market sell-off because many turned to risk-averse ETFs, says Nicholas Colas. Data from October shows that there was “an almost perfect swap” from stocks to bonds.
Registered investment advisers have been increasingly using ETFs for low-cost allocation strategies on behalf of their clients, reports Colas. And as the stock market got more volatile, this ETF user group would have moved away from stocks towards bond ETFs.
Because of this, the equity market might remain volatile for the year. If there are any signs of economic slowing, “we will see the same trade as last week all over again: out of stocks, into bonds,” writes Colas.
Investors Should Keep Both Low-Volatility And Higher Quality Stocks In Portfolios (Alliance Bernstein)
“The best time to prepare for volatility is when it’s not there,” writes Kent Hargis. As a result, it behooves investors to keep stocks with less volatile characteristics even before volatility hits the market. That way, when it does, investors will be prepared.
Additionally, stocks with higher quality characteristics should also be in portfolios. “Our analysis has shown that over a full market cycle, a strategy that combines both less volatile and quality stocks generated even stronger risk-adjusted returns than either approach alone. The reason is because they tend to work best at different times,” writes Hargis.
Focusing on active versus passive management is the wrong way to think about portfolios, argues Fran Kinniry. “I really wouldn’t get hung up on active index as much as I would what are the details of the investment you’re considering,” he says.
Investors should focus on whether or not something is low cost, he argues.
If investors are looking for active management, they should do it not because it’s “not passive” but because there is a talented team working, with an agreeable philosophy. And again, investors should look for the lowest costs.
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