• They cannot predict the future of the stock market or of any investment markets
• They don't know how to protect their clients from all the unpredictable outcomes that could occur

Here's what financial planners can do to help clients deal with volatility based on asset class – e.g., stocks vs. bonds, the relationships among the different asset classes, the impact of currency movements on the performance of different countries' equity markets, and the construction of diversified portfolios to help hedge all these sources of volatility:

• Historical equity performance. They can collect data on how portfolios have performed historically and try to draw some conclusions about how past performance might help provide insights into the future. For example, stocks earn 7% returns over very long periods of time and therefore it makes sense to have a certain proportion of one's holdings in stocks – possibly low-cost index funds – as John Bogle recommends.
• Relationships among different asset classes. They can look at historical relationships between different classes of investments – e.g., stocks often tend to do better during periods when interest rates are dropping because this indicates that the Fed is trying to encourage economic growth which accelerates profits. Conversely, when the Fed raises interest rates, this can lead to declining stock prices. Financial planners can use such relationships to help investors re-balance their portfolios.
• Impact of currency movements on balancing domestic vs. international equities. They can look at historical relationships between currency movements and stock prices in different countries to suggest shifting portfolios between U.S. and non-U.S. equity markets depending on the relative strength or weakness of the U.S. dollar. So, during the last few years as the dollar has hit record lows, certain international markets have done better than those in the U.S. Therefore financial planners could have recommended shifts into portfolios balanced more heavily toward international stocks during this period.
• Building a diversified portfolio. Financial planners can use research into diversification to assess how many stocks or mutual funds of what types will help a client minimize the risk of loss – by constructing portfolios of assets that tend to move in different directions during periods of extreme volatility.

Most investors have been conditioned to believe that what gets reported in the media about the daily ups and downs of the market is an accurate explanation. So, for example, if bad economic news comes out, the market might rise and the media's explanation is that the market rose because investors expect the Fed to cut interest rates. On the other hand, if the next day the economic news is good, the market might rise – with the media offering the explanation that investors think that the odds of a recession have declined.

But there is no logic to these explanations. How so? If the market rises because investors think that the Fed will cut interest rates, then the market should decline if the market thinks that the Fed will be less likely to cut interest rates.

The reality is that markets move up and down because of reasons that are explicitly hidden from the public. Specifically, traders whose volume accounts for a large portion of daily buying and selling are the ones who cause the market to move up and down. And these big traders do not explain to the media the reasons for their decisions to buy or sell.

Unless these reasons are explicitly released to the market in real time – e.g., before the reasons are used to make a trade – then there is no evidentiary basis on which investors can rely to understand the volatility in the market.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.