Advising clients during the Russia-Ukraine war

Russia’s now monthslong invasion of Ukraine has sent an already uneasy market into a tailspin of uncertainty and volatility. We’ve seen a massive bombardment of Ukrainian cities, rattling the nuclear saber, and most recently war crimes including the massacre of civilians in Bucha and reported use of chemical weapons in Mariupol.

The United States has already provided over $1.7 billion in defense and humanitarian supplies, and sources within the White House say that another $750 million will be announced by the Biden Administration in the coming days. However, President Zelensky has said that the United States and the United Nations are not doing enough to stop Vladamir Putin’s war. Telling the United Nations that if it won’t punish Russia for its abuse of its position on the security council then it should ‘dissolve itself.’ This comes at a time when Americans are already facing the highest inflation in the past four decades and the Federal Reserve’s actions hold considerable sway over the markets.

Picture this: It is 4 p.m. on Friday of a down market week. You are ready to go home for the weekend when all of a sudden, your phone starts ringing. It is one of your newer clients, and they are very upset that their portfolio is down 5%. They are panicking and asking if they should sell and prevent further losses.

It’s a situation that any financial advisor is all too familiar with. In response, financial advisors should try to reimagine volatility in these unique times and help clients focus by proactively reaching out to them, being attuned to their risk tolerance and accessing the need for transition strategies where needed — particularly for clients who are retiring in the near future.

Acknowledging fears
Communication is a key element in preventing panic and stress in a situation that, to some extent, may call for those reactions. Clients will appreciate knowing their advisor is aware of stressors and risks in the market and how they can affect their portfolios.

Depending on the size of the portfolio or the number of clients a financial advisor is handling, individual phone calls may be warranted; at the very least, each financial advisor should send an email to every client. Within this phone call or email, briefly go over the current geopolitical situation and how it is affecting the prices we are seeing, such as Brent crude oil surpassing $130 a barrel. Explain the measures that you are already taking to reduce portfolio risk. Lastly, recount comparable situations from the past that you are using as guidance to make your present decisions and how they turned out.

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Another key to navigating these volatile times is to properly assess clients’ risk tolerance and to encourage them to stay in the market. An assessment of a client’s portfolio and its diversification can shed some light on assets that weren’t so risky four months ago but are more so today. Reassessing these now riskier assets versus the percentage of “sleep” assets — the ones that don’t keep you up at night worrying about next-day prices. Portfolios should allocate a percentage to Treasury bonds, which will provide a hedge to the volatility in the market and can help protect the client’s portfolio.

What’s their clock?
A final point to consider is how soon your clients might need to access the funds within their portfolios. If they are looking to retire or make a large purchase within the next five years, then they may not be able to wait out this market volatility. If they are looking to retire, then it may be best to transition their portfolios out of more volatile assets, such as technology or cryptocurrency, and into more stable dividend-yielding stocks or other fixed-income assets.

Look for dividend kings, companies that have consistently increased dividend yields for at least 50 years. This category includes companies such as Coca-Cola, 3M, and the Altria Group.

Like Jason Zweig said, “Falling markets set up a battle between your present self and your future self.” A 10% correction is something we get every other year and, believe it or not, we have bear markets — a 20% drop or more from a high — every five years or so. What do all those occasions have in common? They were great buying opportunities for those who could buy some more and ride out the volatility.

In times of turmoil, commentators say things are different this time. When stocks are going up like they were last year, it looked like 1999 to them. They said the same thing in 2020, 2019, 2017, etc. Sometimes, you must learn to tune out the noise.

The Fed factor
But when clients say, “things are different this time,” they have a point. Inflation has not been as high in 40 years. The Federal Reserve has gone from being overly accommodating to having almost finished its bond-buying program. It is starting to hike interest rates and shrinking its balance sheet. Fiscal stimulus and quantitative easing has ended. And variants like Delta and Omicron continually pose new challenges to combating COVID-19.

We can never buy past performance, but in terms of the broader market, as Mark Twain may have said, “history doesn’t repeat itself, but it often rhymes.” In other words, if your investment horizon is long enough, now might be the time to stay the course and continue with your investment plan. History says that corrections have generally been a more appropriate time to be a buyer than a seller. Panicking, however, has never been a winning strategy.