Stock market volatility has reached a fever pitch in recent months, as has investor anxiety. We don’t expect it to dissipate any time soon. The markets are not trading on fundamentals. Instead, they’re trading on investor sentiment and emotions fueled by outside noise.

How did we get here, and how should advisors work with their clients to focus on the data, not the drama?

Not Your Father’s Stock Market

There are a few things investors need to understand about this stock market that make it considerably different from 15 or 20 years ago. One thing we know is the markets don’t work and function the way they did before. The velocity with which stock markets move is much faster. The upward and downward swings are happening with much greater speed.

A significant part of that transformation over the last decade is the dominance of automated trading. As much as 85% of market trades today are executed by computerized trading or automated machine execution. That’s a far cry from just ten years ago when automated trading accounted for about 20% of trades. Automated trading not only contributes to the higher velocity of trading—but is also a primary contributor to the more significant market selloffs and runups we’ve been experiencing. Couple the increased velocity with the tens of millions of investors accessing hundreds of millions of pieces of data 24/7 at digital speed, and you have a market that can, and will, quickly react to new information or the instant investor sentiment changes.

The media has exacerbated the problem in its seemingly hyperbolic headlines and 24/7 new cycle. The thirst for advertising dollars often makes the media focus on bad news simply because it sells better than good news. Much of the information investors get from the media is centered on driving clicks or viewership, not necessarily on conveying optimal investment advice.

The Challenge for Advisors: Control Client Performance Expectations

Between the stock market volatility and the constant drumming from the media, investors have been pulled in many different directions, often causing them to change their expectations and become emotional about the market.

Emotions often lead to poor investment decisions, which then may lead to underperformance. Current investor losses may have little to do with asset allocation, diversification, or fund choices. Losses may have more to do with suboptimal buy and sell decisions driven by emotions. 

Advisors have historically been challenged to meet client expectations. Past experiences or current circumstantial pressures can be driving forces behind shifting expectations. It’s much more of an issue when clients’ expectations whipsaw along with the market. You’re familiar with the concept: “Keeping up with the Joneses.” Applying this theme in a behavioral finance context, and you have what is referred to as “Anchoring Bias,” where investors errantly anchor portfolio return expectations to recent market highs, instead of taking a holistic view of their progress towards their long-term financial goals.  

How are advisors supposed to manage that? 

The key for advisors is to get control of client expectations through communication and education—and put current market events in perspective. Advisors can work to help their clients avoid common behavioral biases during periods of heightened market volatility by educating them on three critical points:

  • Volatility is not only normal, it also may be good for investment returns
  • Volatility and risk have separate meanings
  • Ignore the noise
Volatility Is Normal

Investors need to understand that market volatility is a normal part of markets. Market pullbacks between 5-10% are a common occurrence, and not unusual to see multiple market pullbacks within the same year. These recalibrations typically occur when the market is overbought or the release of new fundamental news. Investors should in fact consider welcoming market pullbacks because they often help the market reset proper valuation and present investors with a good buying opportunity.

Market Corrections (10-15% declines) are also normal, and while not as prominent as Market Pullbacks, can be viewed in a similar light, but with more caution. When clients are concerned about volatility, it helps to put it in perspective. Remind them that since 2000, the S&P 500 has gained, on average, more than 8% one month following a market correction bottom, going on to then gain more than 24% the following year. So, not only have corrections been short-lived, but they have also been a precursor to significant market gains in their aftermath.

Consider that, in each year since World War II, the market has experienced an average intra-year decline of roughly ~14%, with the market ending the year lower only every third year. As the graphic below shows, the market finished the year in the positive.

Source: Bloomberg

When looking at periods of volatility over a historical timeline of the stock market, it’s clear that stocks can be volatile for periods of time. But over the long-term they historically appear more stable, steadily producing positive returns over time.

The two charts below examine the relative volatility of stock market returns of 5-year rolling returns versus 30-year rolling returns.

A critical takeaway is to educate clients on the importance of following their financial plans and drive awareness of investor behaviors that lead to poor investment decisions during periods of normal market volatility. Reviewing and analyzing a client’s progress towards specific goals should be a primary benchmark for determining changes to an investors financial plan, not TV headlines.

Volatility And Risk Are Not the Same

Investors’ greatest fear is losing money; it’s natural to equate volatility with market risk. However, volatility and risk are not the same, and it’s critical to educate clients on the difference.

Market risk is the chance that by being in the market, you will lose money—though true losses are only realized when a security is sold for a loss. Investors suddenly spooked into bailing out of the market after it has already declined 10 or 15%, could be subjectively “sounding the horn” on a financial plan, still in the 2nd quarter.

Volatility on the other hand, is a range of expected returns or price changes for a particular security, relative to its average – also known as Standard Deviation. Securities with a larger range tend to be larger swings in price and returns, through changing market conditions.

Also, it’s important to remind your clients that volatility is a two-way street. There can be as much volatility to the upside as to the downside. However, investors tend to only focus on the latter, which is why their investment performance can suffer. According to DALBAR’s Investor Behavior Study, twenty years of investor data shows that those who abandoned the market to avoid its worst days almost invariably miss the market’s best days as well. That makes it difficult to overcome the losses incurred and hurts overall investment performance.

Consider this graphic, which shows how your returns would have been impacted on a $10,000 investment if you missed the market’s 5, 10, 30, and 50 best days. What makes it worse for investors is, typically, the market’s best days have occurred near some of its worst days, which is why it’s essential to stay the course during periods of extreme volatility.

Source: FactSet. Returns are based on the S&P 500 Total Return Index. Past performance is not indicative of future returns. An individual cannot invest directly in an index. Data is as of January 31, 2022.

Ignore The Noise

When it comes to investing, the media noise can be deafening. Helping clients understand, while all the significant news events of today may seem consequential, they often have little if any impact on reaching their long-term investment goals. A sudden 1,000-point drop in the market today can certainly be uncomfortable. But through full market cycles, they may barely register as an afterthought on a 5-, 10- or 20-year performance timeline.

It’s critical to have a component to your investment management process that keeps the negative news out of perspective. That will help replace the emotional buy and sell decisions that come with outside market noise, creating more explicit client expectations and potentially more consistent outcomes.

The Bottom Line

We have a phrase at Howard Capital Management, “Focus on the data, not the drama.” We want to make sure we’re making investment decisions on the information we know, not what we think is going to happen.

Right now, there are a lot of unknowns. We are looking for the trends; we concern ourselves with the data, the math, and probabilities.

We trade based on our proprietary HCM-BuyLine®, which is designed to identify clear market trends and seek optimal portfolio allocations through buy and sell decisions based on those trends. Emotions have no place in our process.

The HCM-BuyLine®

The HCM-BuyLine® has been identifying and confirming trends for three decades, enabling Howard Capital Management to sidestep catastrophic market declines in 2000, 2008, and 2020. To learn more about the HCM-BuyLine® and how it is used to tactically manage mutual funds and ETFs, please click here.

About Vance Howard

Vance Howard’s vision for HCM originated after seeing the devastating financial losses investors suffered during the stock market crash of 1987, an event precipitated by computer program trading and investor panic. In an effort to the help investors monitor changing market conditions, he developed the HCM-BuyLine®, a proprietary math-driven indicator, designed with the goal of reducing the impacts of emotional investment decisions.

About Howard Capital Management

Howard Capital Management, Inc. (HCM) is a SEC-Registered Investment Advisory Firm founded by Vance Howard, which offers professional money management services to private clients, financial advisors, and registered investment advisors through a suite of separately managed accounts, retirement tools, self-directed brokerage accounts, proprietary mutual funds, and ETFs. As of December 31, 2021, Howard had assets under management of $5 billion.

For more information, financial advisors should contact their wholesaler by contacting Howard Capital Management at or 770-642-4902.