Risk markets react poorly to uncertainty and recent policy uncertainty has caused equities and other risk assets to sell off in dramatic fashion. Despite the headlines, it is in times like these that good investment advisors truly earn their fees, because many clients would make bad financial decisions out of fear if left to their down devices amid the market turmoil.  When volatility spikes, the key to providing good advice lies in understanding several critical questions about your clients:

• Do your clients have sufficient liquidity to weather the financial storm?

• How are your clients positioned relative to their risk targets?

• Do your clients have idiosyncratic risks on their balance sheets that need to be managed proactively?

• Has volatility created openings for balance sheet optimization in other areas, perhaps on the debt or estate planning side of things?  

In many if not most cases, the best course of action may be to hang tight and take no action at all, which of course can be the most frustrating thing for people who are not students of markets. However, if clients have an overabundance of liquidity or have been under allocated to risk, periods of market turmoil may present opportunities for those with the fortitude to “be greedy when others are fearful”.

My Background in Wealth Management

Before diving deeper into strategies for managing money during volatile markets, let me make an important disclaimer: Nothing in this article should be construed as investment advice. My commentary is directed at financial advisors and not the investing public. With that out of the way, in a prior life I was a partner at Jordan Park, a large Bay Area Multi-Family Office where I co-managed approximately $5 billion in assets for UHNW founders and executives alongside a great partner who also happens to be a great friend. Prior to that, I served as a Vice President in the Private Wealth Management Division at Goldman Sachs. My practice there also focused on managing money for founders and executives with substantial wealth, often tied up in concentrated stock positions from companies they had founded or seeded. These experiences have given me some perspective on how to navigate market volatility and manage risk effectively.

The Current Market Environment

To set the stage for our discussion, let’s examine a few aspects of current market conditions:

• S&P 500: The index entered bear market territory this week, down over 20% from its all-time high of 6,147, which only occurred back in February.

• Volatility Index (VIX): The VIX has spiked to over 50, a level not seen since Covid.

• Treasury Yields: 2-year and 10-year yields have moved significantly year-to-date, with both having dropped about 60bps, once again proving to be safe-haven assets (thank goodness).  

• Sentiment: The Goldman Sachs sentiment indicator is currently marked at -2.5, which suggests an extremely gloomy investor outlook, though this is a good contrarian indicator.  

• High-Yield Credit Spreads: While credit spreads have widened considerably this year, they are not yet at “blow out” levels.

Together, these data points paint an ugly picture, but we have certainly seen worse, even in recent memory.  Importantly, while conditions could certainly deteriorate further from here as companies adjust earnings expectations, it is incumbent upon all advisors to know their clients to ensure that they can help them to stay disciplined.

Reviewing Liquidity Needs

One of the most critical steps advisors should take during market pullbacks is to reassess client liquidity needs. Ideally, this review should have been conducted before the downturn began. Nevertheless, revisiting it now is essential to ensuring clients have sufficient cash and/or high-quality bonds to cover their spending and consumption requirements. Understanding historical equity market behavior can provide valuable context for assessing liquidity needs. After peaking in October 2007, equity markets took about 5 years to fully recover to their 2007 highs following the Great Financial Crisis.  However, the average time to recovery in a more run of the mill bear market is about 3 years, and recovery times can be much lower, i.e., 4-5 months, particularly when the down market is not accompanied by a recession. If clients have sufficient liquidity, they are likely well-positioned to weather the storm. If not, advisors must carefully evaluate options for generating cash should markets remain depressed for an extended period.

Rebalancing Portfolios and Risk Targets

In today’s environment, where we find equity markets down and bond prices up on a YTD basis, many clients are likely underweight equities and overweight bonds relative to their long-term targets. This creates an opportunity to rebalance portfolios back to target allocations. Buy low, sell high. For clients who have been underweight risk in their portfolios or who are holding excess cash on the sidelines, this may be an opportune time to begin investing toward long-term targets.

While markets could certainly continue to deteriorate in the short to medium term, history suggests that investors with a long-term horizon are generally rewarded for staying committed to their plans, particularly if they are able to add to risk following market selloffs. For those hesitant about deploying capital all at once, a phased approach—investing over 3–6 months—may help ease concerns while ensuring progress toward strategic goals.

Other Things to Consider

If clients have substantial amounts of idiosyncratic, i.e., single company or single asset, risk on their balance sheets, it is very important to understand how prepared that asset is to survive the current environment. Advisors must ask, how prepared is that asset’s balance sheet to survive this downturn?  What are the implications for that asset’s future stream of cash flows?  Fully diversified investors who can take comfort in the fact that while the S&P can stay down for long periods of time, it has always come back.  With single company or single asset risk, investors have no such luxury, so it is important to know everything one can about that asset’s prospects.  Some will emerge stronger than ever from the current crisis, but others may not emerge at all…

Though it may not make sense to take actions in portfolios in the current environment, advisors should also help their clients manage overall balance sheet positioning. For mortgages and other loans, most folks have probably locked in rates well below those that are currently available, but if a client made a house purchase in the last year, be on the lookout for opportunities to refinance. If facing a liquidity crunch, explore putting debt against private asset positions. Whole life insurance products with cash surrender value may also be used for liquidity if other sources have dried up. If clients have created GRATs in the last year or so, consider an asset swap.

Conclusion: Staying Disciplined Amid Uncertainty

Periods of market volatility rarely feel comfortable for advisors or their clients. Each bear market is unique in its causes and circumstances, but historically speaking diversified portfolios tend to rebound in relatively short periods of time, though they rarely feel like short periods of time when we are in the middle of the hurricane. Without question, history has shown that disciplined investment strategies—rooted in understanding liquidity needs, risk targets, and long-term objectives—are rewarded over time. By rebalancing portfolios thoughtfully and encouraging clients to get to the right risk targets despite market noise, advisors can help navigate uncertainty while positioning client portfolios for robust future growth.

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