After peaking on April 23, equity markets have experienced an unfortunate downward spiral precipitated by worries about the European sovereign debt crisis and fears of a global double-dip recession. In a flash, the euphoria of recovery was dispelled as the significant burdens of fiscal deficits took center stage. While swelling debt burdens have been an intermediate-term issue for most developed nations, investors have doggedly refused to wait that long for a solution, and demanded instant gratification, or else.

Still, just as quickly, with the advent of corporate earnings season, the markets reversed course, erasing losses after savvy corporations proved by posting positive results that they could handle the economic cycle of boom and bust with aplomb.

While most advisors are comfortable and even adept at managing through the ups and downs of normal market cycles, the market gyrations in recent years have taken a radical turn. Volatility has become the new normal. So have market panics. 

Why? One has only to tune in to the hysteric cacophony at media outlets like CNBC, where a prominent economist such as Nouriel Roubini can get his heavily researched opinions reduced to ten-second sound bites that win him the catchy moniker "Dr. Doom."

Besides the rapid and sensationalist news flow, market panics have also been spurred by a technology driven rise in liquidity. Case in point: the so-called "flash crash" of May 6, 2010, which saw the market swing 1,010 points. The real reasons for the crash remain mysterious, but they were without a doubt exacerbated by massive algorithmic trading and the confluence of different exchanges used by investors large and small. Of course, trends in product development also fuel the proverbial fire of market panics, as evidenced by the rise and widespread use of double-levered directional ETFs or the appropriation of traditional hedging tools such as credit default swaps by speculators. 

One of the tried and true ways for advisors to cope with heightened market volatility and episodes of market panic is to cling harder to the principles of long-term investing and stay the course. It's a valid and worthwhile approach that has worked in the past to be sure. Yet it would seem that in this new rapid-fire world of information and technology, complacency is the enemy of successful investing.
Furthermore, in the aftermath of the "lost decade" of U.S. stock returns from 2000 to 2009, frustrated clients want to trade more frequently and opportunistically, tax consequences be damned, by timing markets to avoid short-term losses and realizing profits when they can rather than sitting still and watching them slowly disappear. But it's difficult to successfully trade and time markets in the short term, so advisors are reticent to do it, and have instead turned to the multitude of products designed to hedge market risk.
Unfortunately, when so many advisors and asset managers turn to the same hedges, these options often fail to be effective. They reflect panic pricing just as much as the assets they're intended to hedge.

So what is the solution to surviving and thriving in an investment world where market panics are increasingly commonplace and market volatility is exceedingly high? There are no easy tricks or antidotes, but consider these three relationship management techniques to avoid being caught in the crosshairs.

Bench Your Benchmarks
To be sure, benchmarks are an important tool of money management to track returns and compare performance objectively on a short-term and long-term basis. However, it is often easy for clients and advisors alike to live and die over benchmark performance comparison, and they get misguided in their investment efforts as a result. Better instead to establish and articulate your clients' lifestyle goals, and manage accordingly. Instead of trying to beat this index or that benchmark, manage your client's assets to make sure she has X dollars in liquidity, Y dollars in income and Z dollars in investments that deliver a growth rate commensurate with her objectives for the money.

For some clients, the process could even be as simple as setting a dollar amount goal to be achieved over a period of time, and conversely setting a dollar limit that assets should never fall below. Whatever form it takes, reinforce those lifestyle goals and objectives at every opportunity as you review performance results. While it is unrealistic not to include any objective barometer of performance, benchmarks should be a talking point, not the final measure.

Turn On A Tactical Tranche
Another way to help cope with market volatility is to embrace it-at least in a measured, modified way. Trading is for traders, but you can strike a balance between short-term plays and your long-term investment horizon.

One way is to carve out a portion of a portfolio, say 10%, and devote it to short-term trading strategies or maneuvers. In this way, the long-term integrity of a client's diversified asset allocation schema is not interrupted, and a manageable amount of portfolio assets are kept liquid to make tactical shifts within a reasonable capital gain/loss budget. While many advisors want to put a tactical overlay on a client's entire asset allocation, the reality is that overlays are largely ineffective because of the liquidity constraints arising from alternative investments. The third-party manager relationships, meanwhile, can make it prohibitive to sell without cutting off future access or compromising the investment thesis.

A tactical portfolio carve-out, on the other hand, could be managed in concert with your client, with transactional tools such as ETFs or other highly liquid investments. Then, at regular intervals, economic and market expectations could be reviewed and parameters for a fair value market trading range established. When markets exceed that range, you can sell off and bank profits and still have dry powder at the ready for a market downturn. If the markets dip below that range, you can make new investments or amplify existing ones to take advantage of the dislocation. This allocation could also be used to express a short-term theme or arbitrage opportunity without disrupting the long-term asset allocation program.

Expect The Unexpected
Finally, it must be said that while investment advisors and clients cannot manage portfolios in perpetual fear of financial calamity, they must expect the unexpected, and have the freedom to change course, or not, as judgment warrants. It sounds simple and straightforward to say, but it is surprising how many advisors doggedly resist changing their minds or admit being wrong about the direction of the markets. Hubris aside, many investment advisors feel pressured by clients into the role of all-knowing expert, and mistakenly believe that they should have seen any and all downturns coming, otherwise they have no right to charge a fee for their services.

To be clear, the role of investment advisors is to develop a plan of investments to match a client's risk tolerance and objectives and then implement the plan by making direct investments themselves or by hiring best-of-breed third party managers. They are not and never will be infallible predictors of the markets. In this vast, interconnected global marketplace, even the savviest managers are vulnerable to fleeting shifts of sentiment. Just ask Barton Biggs, the star hedge fund manager who sold half his equity holdings at the start of July as the market spiraled, only to buy them all back at month's end when the tide had turned.

For a truly productive relationship, investment advisors need to be honest with clients about a change of heart or at least openly acknowledge doubts and uncertainties. If more investment advisors had acknowledged their inability to discern the course of the markets in 2008, perhaps a lot more wealth could have been preserved. For their part, clients need to appreciate the character it takes to truly act as a steward of wealth, and allow reasonable latitude for advisors coping with volatile markets to waffle in judgment or misstep on occasion in trying times.