Setting proper downside risk expectations during market volatility 

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This just in from FinancialPlanning:

The Dow finished the day down by 1,032.95 points, or 4.15% at 23,849.23 — down 2,767 points, or 10.4%. A drop of 10% from its high of 26,616 on Jan. 26 is considered a correction. The S&P 500 tumbled 2.96%, erasing its gains for the year. Ten-year Treasury yields flirted with four-year highs. 

And on Wednesday, Suleman Din wrote an article for FinancialPlanning titled, "Can another digital demand crush be avoided?" Some of the industry's most well-known digital advisors were so inundated by visitor traffic that their websites became inaccessible. Covisum's president, Joe Elsasser, CFP®, commented on the situation for the article:

Advisors also need to rethink their risk estimations and how they communicate that to clients, adds Joe Elsasser, president of advisor software provider Covisum.

“The more central technology becomes to the overall client experience, the more important it will be for firms to be prepared for a run on the bank,” Elsasser says. “A crisis is when everyone wants service.”

A number of advisors are still using risk methodologies that predict market drops like what occurred on Monday are very rare occurrences, Elsasser notes. “Eventually our industry has to move toward heavy-tail models. The old models are wrong too often.”

This week's market dips have reignited conversations about what volatility in the market means for clients. "Should I sell? Should I buy? What's going to happen next?" With SmartRisk, answering these questions is easier. Check out this data:

What is the probability that we would experience Monday's DOW movement?

  • Using the SmartRisk calculation engine and the heavy-tailed model, we would predict that Monday's dip would happen once in 244 days. 
  • What do other models predict? Most of the calculations available for advisors use the Gaussian risk model. This model predicts that the probability of Monday's dip is one occurrence in every 72,514 days (once every 198 years)

What about Thursday's dip?

  • SmartRisk says the probability is one chance in 183 days.
  • What do other models predict? One chance in 12,307 days (one occurrence every 33 years).

This is a perfect example of the Gaussian model being inadequate for professional risk management purposes, or for setting realistic downside expectations with your clients. 


With
 SmartRisk, advisors can analyze portfolio risk and easily communicate with clients to help them avoid costly mistakes. Additionally, when you subscribe to the software you get an entire support team to help you answer client and software questions.

Covisum created SmartRisk to help identify areas where consumers are leaving significant money on the table (usually due to the complexity of the problem). Our software allows financial advisors to capitalize on these classic misunderstandings. Plus, we've added a PowerPoint seminar that only paying subscribers have access to. This resource will help you make the most of your SmartRisk subscription. 

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This entry was posted in In The News, Risk, SmartRisk, portfolio risk, Joe Elsasser, Downside Risk, Market Volatility, FinancialPlannng