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How High-Net-Worth Investors Embrace Market Volatility
For some investors, volatility may be used as a tool for growth. Here’s how.
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The past few years may have felt like a roller coaster for the stock market, and investing in general.
One word in particular may come to mind: Volatility.
For many, this word might spell potential bad news for investments.
However, that may not always be the case for all investors, especially those with high assets who know how to leverage volatility, rather than fear it.
For those looking to insulate their investments from market volatility, or taking advantage of it, a great way to get help can be speaking with a financial advisor.
A 2023 Northwestern Mutual study found that 70% of U.S. millionaires not only work with a financial advisor, but consider financial advisors “their most trusted source of financial advice.”1
Consulting a fiduciary financial advisor can be a great first step to getting the specialized guidance that may be necessary to help ensure you’re on track to meeting your financial goals, especially during varying market conditions.
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Research suggests people who work with a financial advisor could end up with about 15% more money to spend in retirement.2
Hiring an advisor could increase your returns by 2x
Assuming 5% annualized growth of $500k portfolio vs 8% annualized growth of advisor managed portfolio over 25 years.
The hypothetical study discussed above assumes a 5% net return and a 3% net annual value add for professional financial advice to performance based on the Vanguard Whitepaper “Putting a Value on your Value, Quantifying Vanguard Advisor's Alpha”. Please carefully review the methodologies employed in the Vanguard Whitepaper. To receive a copy of the whitepaper, please contact compliance@smartasset.com. The value of professional investment advice is only an illustrative estimate and varies with each unique client's individual circumstances and portfolio composition. Carefully consider your investment objectives, risk factors, and perform your own due diligence before choosing an investment adviser.
Read on to find out why some investors may look at volatility differently than most, and could use it to their potential advantage.
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Why High-Net-Worth Investors Embrace Market Volatility
Volatility Doesn’t Have to Mean Risk
For many investors, the word ‘volatility’ may evoke feelings of uncertainty and fear, and could be associated with risk.
However, it could represent the natural fluctuations of the market, and may actually create potential opportunities for those who understand how to navigate them.
Consider this: Despite short-term fluctuations, the S&P 500 has delivered an average annual return of about 10% over the past century.3 This consistent upward movement may underscore the importance of staying invested for potential long-term wealth creation.
Volatility could instead be considered the measure of how much the price of an asset moves up or down over a certain period.
While these price movements may be unsettling in the short term, they may not always indicate potential loss. In fact, they could potentially be leveraged to your advantage using a strategy like dollar cost averaging (DCA).
Financial advisors can be well-versed in investing strategies to embrace and combat volatility, including DCA. To find out how these strategies work and could potentially fit into your portfolio, take this free quiz to get matched with up to three advisors in just a few minutes.
What is Dollar Cost Averaging (DCA)?
DCA involves investing a fixed amount of money at regular intervals into an asset, regardless of its price at the time.
For example, you might hypothetically invest $10,000 every month into a particular stock or fund. When prices are low, your fixed investment could help buy more shares; when prices are high, it could end up buying fewer.
Over time, this consistent approach could help lower the average cost per share you own, potentially leading to greater returns as the market recovers and grows.
Find a Financial AdvisorCombine DCA with the Power of Compounding
DCA may also help take advantage of the power of compounding.
As your investments potentially grow, the returns may be reinvested, which could create a snowball effect that could help accelerate potential growth over time.
When combined with DCA, compounding could help increase your portfolio’s potential value, especially if you’re consistently adding to your investments.
By systematically investing through DCA and allowing your returns to compound, you may be able to turn market volatility into a potential wealth-building tool.
However, before committing to a strategy like this, it could be a good idea to speak with a financial advisor.
A fiduciary financial advisor could help take an unbiased look at your portfolio and determine whether DCA could be advantageous for your financial goals. Click here to get matched with up to three vetted advisors who serve your area.
You Don’t Need to Time the Market (You Can’t Anyway)
Timing the market can be notoriously difficult and unsuccessful.
DCA may allow you to benefit from the market’s natural fluctuations while compounding could help magnify your potential returns over time, so there’s no real need to try and time the market.
It’s important to recognize that volatility can be a normal part of investing and not an impending signal of potential loss.
How to Form an Investing Strategy to Embrace Volatility
For long-term investors, especially those with significant assets, understanding and embracing volatility could be essential.
With the guidance of a fiduciary financial advisor, you may be able to use strategies like DCA and compounding to enhance your potential investment outcomes, helping turn volatility into an asset rather than a liability.
Consulting a fiduciary financial advisor could help you determine a plan that factors strategies like DCA and compounding into your overall financial goals. Fiduciaries are obligated by law to act in your best interest and any potential conflicts of interest must be disclosed.
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