Volatility does not necessarily equal risk, says G. Scott Clemons, chief investment strategist at Brown Brothers Harriman & Co., New York City.
Instead, volatility can create opportunities if investors are prepared, he says. Clemons was one of the keynote speakers at the CFA Institute Annual Conference in Seattle this week. The CFA Institute offers the Chartered Financial Analyst certification.
In 2008 and 2009, Brown Brothers Harriman clients were asking their advisors what opportunities were being created by the market crash, not panicking and wanting to sell, Clemons says. They were not equating risk with volatility and they could take advantage of the opportunities to buy if they had the cash on hand.
Holding cash, even though it provides no protection against inflation, is advantageous if you want to be able to take advantage of these market opportunities. How risk should be redefined is one of the lessons learned from the 2008 financial crisis, Clemons told the financial professionals attending the annual conference.
At the same time, risk has to be defined differently for each client. The job of the advisor is to make sure the client has considered the impact of his or her beliefs on the portfolio, he says.
One extreme view held by a wealthy Brown Brothers Harriman client is that any volatility is risky. That client has his entire portfolio in fixed income and he knows the limits that puts on his investments, Clemons says.
“That position is comfortable for him. Our job as advisors is to make sure the client has thought through all of the ramifications and, in this case, he knows he is assuming the risk of inflation,” he says.
The flip side of that view is that most clients should consider the affects of inflation on both their liabilities and their assets. If an investor has future liabilities, such as health care or education costs, which will go up with inflation, the assets have to be able to match that growth, Clemons says.
“You have to have the longer conversation with clients, even when the market is doing well, so they know the investment philosophy is not going to change in bad times,” Clemons says. “That conversation creates a great alignment. The client knows you are going to stay the course, and it also keeps you focused on the long run.”