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Financial advisor: Some investors 'may be shocked when the markets are very volatile'

When Silicon Valley Bank and Signature Bank collapsed earlier this month, it set off panic in the markets. Some investors may have been caught flat-footed more than others, according to one expert.

"A lot of people may not be paying attention to how diversified their portfolios are, and they may be shocked when the markets are very volatile," Echo Huang, a financial advisor who runs Echo Wealth Management, recently told Yahoo Finance Live. "So that's what I want to talk about is a few ideas on how to diversify further in a client's portfolio."

"Diversification is the key," Huang said.

Despite recent turbulence in the market — amplified by concerns over regional banks — Huang said she hasn’t noticed any alarm from her clients. She said that's partially thanks to government intervention. The FDIC covers up to $250,000 per depositor of uninsured funds and has stepped in to cover all funds in the case of Silicon Valley Bank and Signature Bank. She also credited her firm’s approach to handling risk.

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Huang manages over $155 million and 100 clients, roughly 80% of whom are in their 50s or 60s. Consequently, much of her work focuses on helping clients protect their retirement funds in the face of volatile markets.

NEW YORK, NEW YORK - MARCH 13: Traders work on the floor of the New York Stock Exchange during morning trading on March 13, 2023 in New York City. Stocks continued their downward trend following the financial news of the failure of Silicon Valley Bank, the biggest U.S. bank failure since the financial crisis in 2008, and the government stepping in to support the banking system after the collapse sparked fears of a ripple effect.  (Photo by Michael M. Santiago/Getty Images)
Traders work on the floor of the New York Stock Exchange during morning trading on March 13, 2023 in New York City. (Photo by Michael M. Santiago/Getty Images) (Michael M. Santiago via Getty Images)

“So I think the planning ahead to deal with this kind of market crash probably has contributed to, I would say, this is a good situation we are facing at this moment,” Huang said.

Echo said her clients primarily mitigate risk by diversifying their portfolios. In particular, she advised investors nearing retirement to consider a fixed indexed annuity for guaranteed income in a down market. She also recommended that they allocate funds to uncorrelated assets like real estate. She said that past studies have shown that allocating 10% to 20% of funds in your portfolio to uncorrelated assets can significantly reduce risk.

“With our clients, we have done planning to have enough emergency funds in one or two banks,” Huang said.

A security guard stands outside of the entrance of the Silicon Valley Bank headquarters in Santa Clara, California, U.S., March 13, 2023. REUTERS/Brittany Hosea-Small
A security guard stands outside of the entrance of the Silicon Valley Bank headquarters in Santa Clara, California, U.S., March 13, 2023. REUTERS/Brittany Hosea-Small (Brittany Hosea-Small / reuters)

Huang said her firm creates a financial roadmap for clients so they can see how much money they need to save for retirement. She said the firm uses Riskalyze, a financial software tool, to assess clients’ risk tolerance, the optimal withdrawal amount, and rate of return for them to achieve their goals.

“I think it's really important to use the right tool,” Huang said.

Huang said her firm puts clients’ portfolios through stress tests to see how they would fare in the event of financial catastrophes like the 2008 financial crisis. She said investors often find themselves surprised by the results.

“So, then we tweak the portfolio to the right type of asset allocation. Then we can show the long-term projected return for this type of portfolio that may not be too aggressive, but still help them outpace inflation, achieve their goals,” Huang said. “So I feel like today, it's a perfect time to talk about whether each person has the right type of risk in their portfolio.”

Dylan Croll is a reporter and researcher at Yahoo Finance. Follow him on Twitter at @CrollonPatrol.

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