When clients want to hold onto cash, advisors need to help them keep a level head

Market volatility can be scary for clients, especially if they are less experienced investors, but rather than a panic move to holding cash, staying in the market is likely to be the best strategy long term.

Veronica Willis is an investment strategy analyst with Wells Fargo Investment Institute and has been with the firm for more than a decade. She has been speaking with InvestmentNews about how best to work with clients during market volatility.

Firstly, those who want to take money out of the market and hold it in cash accounts. Willis has cautioned against this and explains the misconceptions that investors may have about ‘playing it safe’ during market volatility.

“Many investors feel the urge to move to cash during volatility because of the misconception that market volatility means that the market is only moving down. However, there are also up days during these periods because during volatility, the market usually experiences both sharp ups and downs,” she says. “There also might be the misconception that a down market or a volatile market is a bad time to invest, but market volatility actually presents a good opportunity to buy assets that are expected to grow in value over time at a more attractive level.”

The underlying reason for current market volatility is President Trump’s erratic trade policies. But Willis says investors should not be allowing political risks be a primary driver of investment decisions, especially for long term investors.

“I’d encourage investors to instead think about the expected trajectory of the economy over the next 6 to 18 months, instead of what may impact the next couple of months,” she advises. “We expect the economy to improve later this year and next year, and investors should be investing now for that expected recovery instead of moving more defensive in anticipation of near-term volatility.”

And this longer-term focus is a strategy that is important for advisors when dealing with risk-averse clients.

“The market has trended higher over the long term through all sorts of market volatility and economic disruptors,” Willis adds. “Near term volatility shouldn’t be a deterrent from investing for long term goals. For younger investors or anyone investing with a goal that has a long time horizon, it is always a good idea to remind them that there is time to recover for any pullbacks in the near term.”

Communication is key and while nervous clients may be inclined to make emotionally driven investment decisions, Willis says that advisors can help put current volatility in perspective, by reminding them of how the market have overcome previous challenges and disruptions.

“Another idea is to keep the discussion focused on the client’s goals,” she says. “If the allocation or investment plan was made with a specific goal in mind, remind the client that the allocation was set with that goal in mind and that deviating from it could affect the ability to reach that goal.”

Willis says that timing the market is difficult, so clients who are seeing this as the right strategy should be helped to understand the complexity.

“The market’s best and worst days historically are clustered together and tend to happen during periods of extreme volatility, bear markets, or economic recessions. An investor might need to be in the market one day, out the next, and in again the following day to avoid a down day and still participate on the up days,” she says. “That type of precision is not realistic, and the risk of missing those best days is too high. Over time, it’s better to stay invested over trying to time the market to avoid the risk of missing those best days.”

As for asset allocations, Willis has favored large- and mid-cap equities as attractive during this dip but this boils down to two specific factors

“The sectors I recommend focusing on right now are quality sectors with a focus on strong balance sheets and reliable trends on earnings,” she says. “Right now, that is Information Technology Communication Services, and Financials. Those sectors are positioned well to benefit from both the current environment as those companies should be able to be more nimble through uncertainty and volatility. But they should also do well through an economic recovery in 2026.”

And in the context of ongoing tariff uncertainties, how might international exposure factor into a well-diversified portfolio right now, given that they have outperformed so far this year as a lot of the trade and economic uncertainties have impacted US markets to a greater degree.

“Periods like this are why we recommend being globally diversified because having exposure to international assets during periods that US assets have struggled may help mitigate downside risk in a diversified portfolio,” says Willis. “We don’t recommend overextending into international assets as we expect US assets to eventually regain leadership, but a diversified allocation should include some international exposure.”

But what about those clients that absolutely want to have cash holdings; is there a sweet spot amount?

“The right amount of cash will vary for each investor’s needs,” says Willis. “It’s a good idea to dedicate enough cash to be able to take advantage of buying opportunities without having to liquidate other positions.”

Finally, what indicators or trends will Willis and her colleagues be watching closely over the next few quarters to assess whether market sentiment is shifting toward greater stability?

“Economic data and the Fed are going to be in the spotlight. We’re looking for signs that the Fed will resume cutting rates, but do not expect the economy to weaken significantly or fall into recession,” she says. “Developments on trade will also be key, but that is more likely to contribute to market noise as opposed to the hard economic data. We’re also looking at the sentient survey data for signs of stabilization there. Consumer confidence has been hit pretty hard due to the trade uncertainties, but it’s possible that if more clarity arises in the coming months, we could see a recovery.”