To Calm Client Fears About International Stocks, Speak Their Language

To Calm Client Fears About International Stocks, Speak Their Language

Written by Guest Writer: Chris Shuba, Founder of Helios Quantitative Research

Market volatility is normal. And though we can’t predict the future, volatility in the coming years is a safe bet. Clients look to you, their advisor, to build investment portfolios that can help them navigate through unstable times.

Clients tend to invest in what they are familiar with. They recognize U.S.-based indices like the Dow, the Russell, Nasdaq and the S&P 500, and build their portfolios with them. Currently, U.S. investors have nearly 75% of their investments in U.S.-based assets¹. Diversification, such as exposure to international markets, is a key component to a stronger portfolio and can help protect clients against volatility. As their advisor, you can provide simple recommendations based on multi-factor data to help bridge this “international” gap in your clients’ portfolios.

If you’re not familiar with the concept of multi-factor investing, it’s quite simple. Specific investment factors— value, quality, momentum, low volatility, and size—can be used to select assets that tilt a portfolio in one direction with the goal of boosting returns. For example, a portfolio that focuses on “value” seeks to identify stocks that demonstrate a favorable price-to-earnings ratio. A focus on “quality” looks at equity return, leverage ratio, and earnings variability, while a momentum-based strategy weighs heavily on stocks that have been outperforming the market for a given period and are expected to continue in the foreseeable future. Each factor-based strategy provides specific benefits depending on the market environment at the time.

The powerful thing about introducing multi-factor investing in a client discussion is that it gives you the opportunity to compare apples to apples, making it much easier for your clients to understand not only why international equities are a valuable diversification tool, but also how multiple components in a portfolio work together to help ensure sustainable returns over the long term, even in the face of unprecedented volatility. You can start by introducing the concepts of value, quality, and momentum—all factors that are easy to explain, and that most every investor can grasp quickly. Discuss how a diversified portfolio can help create a more consistent return structure, and then use real-world data and market information to create a simple model that illustrates the 12-month implied volatility for international equities compared to something every client is familiar with: domestic large caps within the S&P 500. What the numbers show is that volatility tracks quite consistently across the two asset classes.

Source: Helios Quantitative Research

Next, discuss how the risk associated with the two asset classes is also similar, and by overweighting international equities within a U.S.-equities-based portfolio, risk is reduced because, quite simply, the client doesn’t have all eggs in one basket. At the same time, the implied volatility chart can be used to talk through how this diversification can help smooth volatility over time.

Telling this simple story can do wonders at calming client nerves, setting their expectations not only about the value of international equities and why they serve as an important diversification tool even when they are underperforming, but also about the need to protect against continued volatility within the U.S. equities space. While the value potential for U.S. equities seems high, there’s no way to predict how long that value will last. By leveraging a cost-effective, multi-factor ETF that focuses on high quality, high value international equities, your clients can effectively “dip their toes in the water” using a tool that is specifically designed to reduce the impact of volatility on their portfolio.

¹Source: Openfolio

Opinions and statements of market trends that are based on current market conditions constitute our judgment and are subject to change without notice. These views described may not be suitable for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations. Past performance is no guarantee of future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. ETF shares are bought and sold throughout the day on an exchange at market price (not NAV) through a brokerage account, and are not individually redeemed from the fund. Shares may only be redeemed directly from a fund by Authorized Participants, in very large creation/redemption units. For all products, brokerage commissions will reduce returns.

J.P. Morgan Asset Management is the marketing name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide.
J.P. Morgan Asset Management
Empowering Better Decisions
Twitter Email

See how ETFs differ from other investment vehicles, learn how to evaluate them, and discover how ETFs can be used effectively to achieve a diversity of investment strategies. ... Click for full bio

Most Read IRIS Articles of the Week (February 20-24)

Most Read IRIS Articles of the Week (February 20-24)

Here’s a look at the Top 11 Most Viewed Articles of the Week on, February 20-24, 2017 

Click the headline to read the full article.


1. Cyborgs Are the Future for Advisors

Becoming cyborgs is the way to go for financial advisers…blending robotics and humans into one organism. You see, I am convinced that robo-advice models will succeed and prosper. — Tony Vidler

2. Building a Better Index With Strategic Beta

With the global economy warming up, but political uncertainty remaining a constant, it’s more important than ever for investors to position their global portfolios to navigate long-term market volatility. That’s where the power of diversification comes in ... — Yazann Romahi

3. Reinvigorate Your Financial Life With Laser Focus on Market Risk and Shortfall Risk

The financial world is noisy and it’s easy to become distracted from your most important long-term goals. One way to cut through the noise is to focus on just the two factors that ultimately determine your approach to everything else in your financial life; namely, Market Risk and Shortfall Risk. — James E. Wilson

4. When it Comes to Your Money, Does the Truth Hurt?

It’s important to admit the truth behind our actions in order to rectify past and future mistakes or regrets. Living in denial only perpetuates making decisions that could potentially lead to financial disaster. — Michael Kay

5. A Skill for Advisors to Master to Keep Clients for Life

There's one key approach that makes you invaluable to your clients so they want to stay with you for the long-term. You have to genuinely be interested in people. — Paul Kingsman

6. Relationships & Money: 6 Stories to Share With Your New Partner

When you start dating, you usually start off sharing stories. Tales of your childhood, your previous relationships and your college days. Those stories help explain to your partner who you are and how you act. — Mary Beth Storjohann

7. Great Leaders Don't Talk About Revenue

It runs counter-intuitive to what we have been led to believe business is all about: make more money and everybody wins, surely? Talk about revenue so that everyone knows what’s important. What’s the problem? — Barry Chandler

8. Trump's Tax Proposals Could Cost You (and What to do About It)

In the wake of President Donald Trump’s stunning upset victory, however, muni investors were forced to readjust their expectations of fiscal policy going forward. Because Trump had campaigned on deep cuts to corporate and personal income taxes, equities soared while munis sold off, ending a near-record 54 weeks of net inflows. — Frank Holmes

9. Sometimes Doing What’s Best for Customers Isn’t Always Going to Make Them Happy

What does it mean to be a customer-centric company? That seems to be the question of the week. It started off with one of our subscribers emailing in the question, followed by two reporters wanting my take on this now-popular phrase for their interviews. — Paul Laughlin

10. Why We Solve the Wrong Problems

Everywhere I look I see organizations and people investing heavily in new initiatives, transformation, and change programs. And in almost every case the goals will never be met. One of the most crucial causes of the failure? The right questions were never asked at the outset. — Paul Taylor

11. Private Equity Head Tapped to “Fix” US Intelligence Apparatus. Why?

Why should we think the head of a private equity company could effectively “fix” US Intelligence? It is not apparent that this individual is even remotely qualified to fix the US intelligence apparatus. — Kathleen McBride​​​​​​​

Douglas Heikkinen
Twitter Email

IRIS Founder and Producer of Perspective—a personal look at the industry, and notables who share what they’ve learned, regretted, won, lost and what continues to ... Click for full bio