Investing & Economy

Managing Risk in Volatile Times

Economic outlook concerns investors

Investors are increasingly concerned about continued market volatility in the early 2020s. A recent Natixis survey of institutional investors found a majority of those polled were concerned about the impact of such trends as higher public debt, slower global growth, the side effects of long-term low interest rates, and uncertainty about upcoming elections. A December 2019 survey of smaller investors by NerdWallet found similar concerns, with 49 percent planning to change their investment strategy in coming months due to the economic climate.

Many clients are anxious and concerned about what may happen next, said Sulzberger Capital Advisors, President Gene C. Sulzberger. In an interview with Advisors Magazine, Sulzberger said he has regular conversations with clients to review risks within their portfolios, and to discuss how to prepare for the market volatility that many experts are predicting for the next several months.

There are several ways to make gradual changes in portfolios to reduce volatility and mitigate risk, he said. There are tools to manage risk (such as reviewing Sortino and Sharpe ratios) and to measure the volatility of a given asset class over time. It is also important to understand the client’s personal risk tolerance. Knowing and understanding those trends help advisors make better recommendations.

Sulzberger identified three major areas where he sees investors making the largest risk-related mistakes. One is becoming so fixated on a certain asset, or certain types of assets, that they over-concentrate their positions.

Sulzberger400x600“You want to have exposure to different asset classes. But having a concentration in an asset class – or even in one particular stock or investment –can be a problem,” said Sulzberger, adding that during a period of time, some assets and classes will perform better than the market average, some will perform worse, and sometimes they will fall in the middle. “Even a historically sound blue-chip stock can decline over the long-term when industry and economic factors shift. Diversifying investments among asset classes and individual holdings helps reduce that risk and mitigate the damage if the markets turn against you.”

The second area requiring better focus requires understanding volatility. Some types of securities are more volatile than others, just as various sectors are.

“Certain things like gold, for instance, can be quite volatile with huge swings in value,” Sulzberger said.

Other examples include commodities funds, energy investments, and the oil sector. During his periodic reviews with clients, Sulzberger determines whether there are volatile securities in their portfolio and how much of the total those holdings comprise.

"We look at using cash balances and short-term bond balances as a shock absorber, should we have a pull-back,” he said. “The goal is to adjust the mix to minimize volatility.”

The growing number of alternative investments being proposed to clients is a third area of concern. Sulzberger said he has numerous attorneys as clients, and many of them are approached about investing $100,000 or $200,000 in deals. Later those deals may “go belly-up.”

“That real estate investment may have been focused on just one or two strip malls that lost their big tenants and really suffered. Did anyone do any real due diligence on that?” he said.

Even with alternative investments, Sulzberger uses third party companies to help perform due diligence and evaluate potential deals for clients. Those outside parties research the principals’ track record on other deals, and rank and rate the proposed alternative investments. Sulzberger avoids real estate investments that just have one or two properties, such as a shopping center, as they may be too volatile going forward.

"Whether you want to go into a real estate investment with your friend or somebody you trust, they may have the best of intentions,” he said. “But if the opportunity does not have a track record, or a diversity of assets within the investment, the situation can become problematic. That’s where people can lose significant money.”

Those types of risks underscore why financial literacy is so important. If clients are not aware of what’s going on in the financial industry, Sulzberger said they can be taken advantage of or make poor decisions about sticking to their budgets.

“We work hard for our dollars,” Sulzberger said. “Financial literacy has a lot to do with how you can maximize those dollars in the best way possible.”

Sulzberger Capital Advisors helps clients become more financially literate through continuing conversations about their investment options and goals. For example, Sulzberger might be recommending 20 funds for a portfolio, but he only discusses three or four of those at a time. If he provides more information than the average person can absorb, clients will often become overwhelmed. His goal is to keep clients interested and involved.

“I think a large part of my practice is almost being a therapist for people,” Sulzberger said. “It’s about listening to their anxieties, and tapping into what they lose sleep over.” He added, “If a client is too anxious about a volatile investment in their account, “the best solution is often to simply get out of that investment.”

Helping people with those types of challenges are what drew Sulzberger to wealth planning and financial services. He said he has always enjoyed working with math and learning about companies, and becoming a financial advisor allowed him to build a meaningful career helping others.

For more information on Sulzberger Capital Advisors, visit sulzbergercapital.com

 

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