Navigating volatility: concepts for investment success in turbulent times.

• Author: George, David
• Position: Financial planning

This historic market downturn is instilling in people a fear of volatile markets--and making wealth preservation and recovery key issues. As trusted advisers, what can CPAs say and offer to clients? Plenty.

First, CPAs (or qualified CPA.PFS or CPA/CFP) should determine if a client's investment assets are in line with their goals and objectives, as well as risk tolerance.

The decision on whether your client needs to take any action might center on:

* A need to sell assets to raise cash for an intended purpose in the short term;

* A determination whether, after a significant downturn in markets, circumstances exist for the investment portfolio that were not present when the asset allocation was conceived, making the allocation inappropriate; and

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* Whether the portfolio is invested so significantly different when taking into account goals, investment objectives and risk tolerance, an action to change the portfolio should be taken.

Keep an investment strategy simple for clients so they can understand and be clear about what risks they are taking. Too often risk is brought up when things do not go well rather the when the ivestments are made.

Anxious clients need reminding that market fluctuations have been around since the dawn of markets, and markets eventually recover we just do not know how long it will take.

The following concepts can help clients toward investment success.

1. Diversify

   No one knows what will be the next best performer--or major bust. But if you are broadly diversified, you don't have to make that decision.

   Keep the job of investment selection of individual stocks to a professional money manager (either mutual funds or individual stock manager). Humans are generally poorly wired for investing, as emotions often cause investors to do the opposite of what should be done. Use diversification effectively and choose a wide range of broad asset classed and styles that match the client's objectives.

2. Dissimilar Price Movement Diversification Enhances Returns

   To the extent possible, create an investment portfolio with investments that have dissimilar price movements. It's clear that between two investments with the same average arithmetic rate of return over five years, but with the different volatility, the lower volatile investment will have a higher compound rate of return than the more volatile investment.

   Design a portfolio with as little volatility as necessary to achieve the client's goals.

3. Employ...