What Now?

2020 began with the promise of continued strong economic and financial performance and a hint of uncertainty surrounding the November Presidential election.  The nation’s unemployment rate was near sixty-year lows, and labor force participation rates were near sixty-year highs.  The longest bull market in U.S. history was still running, despite concerns by some investors and analysts that it was getting very long in the tooth.  The economy was slowing, but still relatively strong and few economists predicted strong recessionary pressures.

Not long into January, we became aware of a concentration of pneumonia-like illnesses originating in Wuhan, China.  But like countless other health concerns, the news was largely glossed over by most.  China’s health concerns were half a world away, and many government officials and media outlets view the news coming out of China with a healthy dose of skepticism anyway.

Even as the candidates for the Democratic Presidential nomination winnowed, concerns over the spread of the COVID-19 virus introduced new uncertainty for equity markets around the globe to absorb and process.  In late February equity markets around the globe experienced their worst one week decline since the Great Recession in 2008.  And the world has not been the same since.

We have now lived through six of the most interesting weeks that investors have ever experienced.   Forced business closures have shut down entire industries, and the biggest question about the economy now is not whether there will be a recession, but how long will it last and how deep will it be?  Millions of furloughed workers have applied for unemployment, and we are all spending a lot more time at home.  Despite the seemingly endless negative news, we do see some glimmers of hope, however.  The Dow Jones Industrial Average gained over 11% on Tuesday March 24, 2020; the best day for that index in 87 years.

In light of all the doom and gloom and uncertainty prevalent today, you may be asking yourself “what now?” as we move forward and plan for the next three quarters of 2020.  What follows are some common questions, scenarios and strategic conversations that our planners have had with other clients over the past month or so.  The answers to some of these common questions may provide you with some answers and direction to the question, what now?

“Where can I/we turn for safety?”

This question has come up with retirees quite a few times in recent weeks.  Part of the discussion usually involves a conversation focused on investment alternatives, and their actual and perceived levels of risk.  Unfortunately, there is no investment vehicle that exists that protects an investor from all types of financial and economic risk.

We are all very familiar with the volatility of stocks, especially over the past month or so.  Market risk is a very real and painful risk for many investors, as quality stock and equity fund investments can suffer sudden price declines under bear market conditions.  Why do investors own stocks then?  Equities provide higher expected investment returns than any other type of investment because of market risk, and equities are the only type of investment that protect investors from purchasing power (inflation) risk.

Frequently in these conversations we are asked about replacing equities or a portion of a client’s equities with bonds, cash and even some annuity types.  Each of these investment types replaces market risk with a different type or types of risk.  In many cases the risks exchanged for market risk cause greater long-term damage to clients’ portfolios and financial plans than the short-term market volatility experienced with stocks.  In this low interest rate environment, purchasing the wrong kinds of bonds can lead to losses greater than those experienced with stocks.

The bottom line is that each investment type and asset class placed in our client’s investment portfolio has a specific purpose in helping them reach their financial goals.  Once clients are properly allocated, the only changes that should be made are to rebalance the portfolio or when financial goals or time horizons change.  Any other changes jeopardize our clients’ chances of reaching their financial goals.

“Will I lose all of my money?”

The short answer is no, provided you are utilizing one of our low-cost, well-diversified investment allocation strategies with over 10,000 stocks and bonds.  During times of extreme market volatility, it can feel like the losses will never end and that you could end up with nothing left.  It is important to remember that there are millions of investors in each investment market and this makes markets very efficient most of the time.  But even when markets are not efficient, there needs to be a buyer and a seller for each market transaction.  That means that for every bearish or panicked seller, there is a bullish, strategic investor on the other side of the transaction looking to score a bargain.

Even in distressed or bear markets, an equilibrium point will eventually be reached where the prices of stocks are just too attractive for risk-averse investors to pass up.  Waiting out all of the volatility until the equilibrium point is reached can be difficult for some investors, however, as it may take weeks, months and possibly years for that to occur.

“Is now a good time to buy stocks?”

If your risk tolerance indicates that you should have equities, or more equities, in your portfolio then the answer to this question is yes, it is a great time to buy stocks.  With stocks from around the world selling at a twenty to twenty-five percent discount from the beginning of the year, investors who have the financial means and liquidity to purchase additional stocks will reap the benefits of buying low in the years to come.

This does not mean that you should invest more aggressively by purchasing more stocks than your risk tolerance dictates, however.  Investing more aggressively than your recommended asset allocation can lead to unexpected losses, loss of liquidity and jeopardize your ability to reach your financial goals.

Actions you can take to improve your financial situation

The recent market downturn and the Federal Reserve’s interest rate reduction do present some unique opportunities that some may be able to act upon.  Let us start with the market downturn first.  Investors who have concentrated stock positions outside of IRA or other tax-qualified accounts may be able to take advantage of the recent downturn to diversify their investment portfolios and reduce or eliminate capital gains taxes.  Another popular strategy for some investors during bear markets is tax-loss harvesting.  Investors should work with their financial planner to pursue tax-loss harvesting strategies because of the complications that can arise, but this strategy can greatly benefit investors in the future.

Low interest rates hurt bond investors, and that is bad news for retirees and those approaching retirement.  But it is good news for people who still have mortgages or other substantial debts.  This may be an opportunity to make lemonade from lemons and reduce monthly mortgage payments or other monthly debt payments.

We are all in uncharted territory right now, and the past month-and-a-half have thrown a lot of uncertainty our way.  Although we cannot meet in person for the time being, your planners at Bollin Wealth Management are available for phone calls and web conferences to answer your questions and provide financial guidance.  Stay safe!