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Talking Politics IS Talking Volatility

Ralph Drybrough | September 6

Your phone rings, you look to see who calls, it's a longtime client. You pick it up, and the first thing your clients says is, "Have you seen the headlines today, and do we need to do anything about it?"

According to the 2017 Schwab Independent Advisor Outlook Study, 84% of advisors fielded this type of call and had to reassure their clients that they were meeting their investment goals. The biggest cause of worry: the political environment in the US. A whopping 97% of advisors stated this as the main concern of their clients. The second biggest concern for investors is volatility of the U.S. equity markets. No huge surprise, but here’s what is interesting: clients are more than twice as likely to want to talk about politics than they are to discuss the potential for volatility.

Schwab released their survey in July, but these concerns are most likely still out there. With the number and frequency of unexpected actions coming from Washington D.C., it's safe to say that the specter of volatility from the survey period is going nowhere. As proof of this, look no further than the increase in the value of the VIX and record open interest for VIX futures during the month of August.

Harnessing The Relationship Between Politics and Volatility

This separation between the two topics begs a meaningful question: Where does the discussion of politics end and volatility begin? Living in a capitalist society, where markets are inextricably linked to everything from commuting times to the price of roast chicken, it's a challenge to delineate the effect of policy actions from their economic impact, but the relationship can be complex. Client preference for politics creates an opportunity for advisors to provide reassurance as they bridge the gap between D.C. and Wall Street, but it's even more powerful if an advisor can take action to allay their clients’ concerns.

Preparing portfolios for times such as these is StratiFi’s core focus. Through our application of customized option overlays, we seek to reduce volatility and drawdown events and create a more stable investing experience, despite the presence of potential or actual threats to the markets.

Let's also be clear, unrest in D.C. is only one potential source of an increase in volatility. We don't claim to know when the next volatility shock is going to occur, or whether it's going to originate from a domestic policy decision, but we do know one thing: With the potential of a looming market threat, an advisor who can demonstrate a powerful solution to concerned clients is more likely to retain concerned clients than those who cannot. Furthermore, if and when that event occurs, the advisors who put appropriate protection in place has the potential to come out looking like a hero, while those who did not could face catastrophic loss both through the decrease in assets and loss of clients.

If you would like to learn how StratiFi can help protect your clients' portfolios get started today.

To learn more about the truth behind asset correlations and volatility, click here for our complimentary eBook "The Five Myths that Put Portfolios at Risk: Revealing the truth and improving investment outcomes using options."