Is there a scarier word than “pandemic”? In addition to the human toll, the coronavirus spreading around the world is also sickening supply chains and denting GDP growth. The Kiplinger Letter is forecasting a realistic, worst-case scenario wherein economic growth is cut in half, to something like 1.6% this year. (See How Hard Will Coronavirus Hit U.S., Global Economies?)
No wonder stock markets are in a spiral. Concerns are so severe that the Fed took emergency measures on March 3, cutting interest rates by half a point. What should investors do?
We reached out to the financial planners who contribute to our Wealth Creation channel to discover what they're telling different types of clients. Here is what they had to say.
This Is a Big Test (and an Opportunity!) for Younger Investors
- By Paul V. Sydlansky, CFP®
As much as we knew a drop was eventually coming and have continually told clients this bull market will end, when it does happen it is scary (especially when the situation could also pose a physical risk to your health). This is hard. No one likes to lose money, especially this fast and with no real end in sight.
For my younger clients with young families (those in their 30s and early 40s) who have had little experience with this is a real test. For most, it is their first real downturn, because they weren’t investing (or didn’t have much knowledge) back in 2008. However, they should view this as a great long-term retirement investing opportunity. If this is money for 20-30 years down the road as it is for most, would you rather buy in at the high or a 10%-15% discount?
Here’s how they can take advantage:
If you do have some extra money on the sideline that you would like to deploy, I stress dollar cost averaging into the market. Invest maybe 25% of what you wanted to today, and if the market continues to fall do another 25% next week. Repeat until you are done. And if the market goes back up, maybe you don’t contribute those extra dollars.
I would not try this with short-term money you need!
Lastly, in a situation like this, the world hasn’t changed, I view it more of a pause and a slowdown, so when we do know what the end is for this virus and its impact, I see the markets bouncing back very quickly.
Paul V. Sydlansky, founder of Lake Road Advisors LLC, has worked in the financial services industry for over 20 years. Paul is a CERTIFIED FINANCIAL PLANNER™ and a member of the National Association of Personal Financial Advisors (NAPFA) and the XY Planning Network (XYPN). In 2018 he was named to Investopedia's Top 100 Financial Advisors list.
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If You're Tempted to React to News, You're Already Too Late
- By Eric Roberge, CFP®
Not a single client has called us with concerns, and that's because education and coaching is a huge part of what we do. Our clients understand that market corrections are completely normal. While they're not fun, they are part of normal market cycles.
Not to mention, we believe markets are efficient ... so if you're reacting to something in the news, it's already too late. The market has already incorporated that information into prices, so it's not really effective to run around trying to make massive moves with your investments. You've missed the boat ... and if you get out, you then miss the bounce back when it happens.
The bottom line is stick to your plan, whatever that plan may be.
Eric Roberge, CFP, is the founder of Beyond Your Hammock, a virtual financial planning firm that helps professionals in their 30s and 40s make mindful decisions with their money and strategically use their incomes to achieve financial freedom.
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Sell Highly Appreciated Stocks for a Reduced Tax Bill
- By T. Eric Reich, CFP®
I am currently telling clients who call that this is nothing new. If we look back at the last few “outbreaks” — including Zika, Ebola, MERS and SARS — the market has dropped 12%-13% in the past, and in some ways those illnesses were considered more dangerous than the coronavirus currently appears.
The fundamentals of the economy are still strong, with strong earnings, record low unemployment, low (and possibly going lower still) interest rates. Now is absolutely not the time to panic, and this is likely NOT the “big one” but rather, an opportunity to sell highly appreciated stocks with a reduced tax bill and also to buy for those who have been waiting on the sidelines.
There is so much money still on the sidelines from the last great recession that when new money starts pouring in it will help push everything back up. That’s why we haven’t seen a larger drop like we normally would have in the last decade, because every time it starts to fall, more money from the sidelines comes in and reverses the course.
T. Eric Reich, president of Reich Asset Management, LLC, is a Certified Financial Planner™ professional, holds his Certified Investment Management Analyst certification, and holds Chartered Life Underwriter® and Chartered Financial Consultant® designations.
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Got $300,000 to Invest Right Now? One Client's Story
- By Michael Aloi, CFP®
While not in this exact form, the world has experienced similar health scares in the past. During past breakouts such as SARS and the bird flu, there was a temporary slowdown in growth that quickly recovered after the illness was brought under control. As history often rhymes, it’s probable that economic data over the first half of 2020 will be disappointing only to recover later this year, assuming the virus is contained.
Now is not the time to panic. Additional volatility is likely to continue into the near future … to which the best response is to stay the course. Further, it could be an opportune time to add to your portfolio with long-term oriented capital.
For instance, I have a client, in her 60s who came into $300,000 of cash through an inheritance two weeks ago. We agreed to dollar cost average the money slowly into a diversified portfolio -- $100,000 per month for the next three months. By staggering the entry points, instead of putting all of the money in the market at once, we are hoping to avoid buying into a “falling knife” or a market that continues to drop for the next several days or weeks. It also gives us time to assess the market before we put the next tranche of money to work.
Michael Aloi, is a CERTIFIED FINANCIAL PLANNER™ Practitioner and Accredited Wealth Management Advisor℠ with Summit Financial LLC.
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'Stay the Course' Is an Oversimplification for Some
- By Evan T. Beach, CFP®
Our approach is a bit different than the typical “stay the course” mantra, because of who we serve (high net worth retirees). When working with retirees, especially those in the first 10 years of retirement, “stay the course” is a very risky proposition. Instead, I would say have a discipline and stick with the discipline. You should not move to cash, you should not go all in. A discipline could be time-based rebalancing or tolerance band rebalancing. This will force you to buy low and to sell high.
We believe that a dynamic strategy that makes small reductions to stock exposure in times like these and small increases in years like 2019 are best suited for retirees, to smooth out the returns. Our portfolios have adjusted three times this year in accordance to the formula we use within that strategy.
Evan T. Beach is a Certified Financial Planner™ professional and an Accredited Wealth Management Adviser. His knowledge is concentrated on the issues that arise in retirement and how to plan for them. Beach teaches retirement planning courses at several local universities and continuing education courses to CPAs.
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The Boat May Be Rocking, But Don’t Abandon Ship
- By Mike Piershale, ChFC®
I would tell a retiree to stay with our preset plan, which in most cases would be a conservative, well-diversified portfolio, with a large part of it in fixed income, including short-term bonds and cash. I would also advise them not to jump out of the ship in the middle of the storm, which means not to sell out of the stock portion of their portfolio after they have already dropped.
My advice to an investor who has a time horizon of 10 years or longer would also be to also be to ride out the storm. However, at these levels, with market multiples below 17, they may want to start dollar cost averaging money into the stock market.
Mike Piershale, ChFC, is president of Piershale Financial Group in Barrington, Illinois. He works directly with clients on retirement and estate planning, portfolio management and insurance needs.
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If You're Worried, Consider Taking Some Risk Off the Table
- By Jamie P. Hopkins, CFP®
With the coronavirus still coming onto the stage and information scare, the markets are reacting quickly to new information. Expect the roller-coaster to continue as new information keeps hitting the airwaves and things develop and change, both positively and negatively.
When you see a big market swing and it makes you upset or worried about your own finances, most likely your risk tolerance level is not matching your investment allocations. Anxiety and concern about market downturns or investment losses show that you have a large degree of risk aversion at this point in your life. Risk tolerances and risk capacities change over time. Three to five years before retirement you are likely to be a lot less risk tolerant because financial losses are very detrimental to your near term life. However, if you are 34, losses to your retirement portfolio or market downturns are not as painful because you have a long time horizon to recover.
In short, if market volatility causes you concern and anxiety it is a good time to re-evaluate your investment allocation and perhaps take some risk off the table.
Look, the market is supposed to have volatility, it is also why the equity markets pay higher returns in the long run because there is some risk. You can take risk off the table by getting out of the market, but if you run to Treasury bonds your return will decline in the long run. As such, what you really need is a well-diversified investment portfolio that takes into consideration your investment goals. Don’t take on risk that you don’t have to, but don’t give up return just because you don’t like the bumps along the way.
I often say father time is undefeated when it comes to investing and so is diversification. Volatile markets are when people make and lose a fortune.
Jamie Hopkins, Esq., LLM, MBA, CFP®, RICP®, serves as Director of Retirement Research at Carson Wealth and is a finance professor of practice at Creighton University's Heider College of Business. His most recent book, "Rewirement: Rewiring The Way You Think About Retirement," details the behavioral finance issues that hold people back from a more financially secure retirement.
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Take a Wait and See Approach
- By Tim Fries, Protective Technologies Capital
Most of the investors I work with have been modeling "recession cases" for the last few years, so I think there has almost been a feeling that the economy was due for a pullback at some point. Until recently, there wasn't really a good candidate for what the catalyst for such a pullback may have been. However, the coronavirus may have been the catalyst.
We've had a number of good years in the market, and it's likely that people are selling now to take profits and wait until more information is available on what the impact of the virus will be.
In my opinion, the range of potential impact scenarios spans anywhere from this being a minor, temporary disruption on one hand, to this being a catalyst for a recession both globally and in the U.S. Compounding the latter scenario are the political implications, as the market would likely view a Sanders administration unfavorably. If Sen. Sanders is the Democratic nominee, and the U.S. is in a recession in November, the recession may make Trump's case for re-election more difficult.
The market is forecasting multiple interest rate cuts in 2020, so it's unlikely fixed income will offer much of a return going forward. Therefore, I suspect that once more information is available on the economic impact of the virus, the uncertainty trade will end, and investors will rotate back into the sectors that are expected to be the least impacted.
Tim Fries is co-founder of Protective Technologies Capital, an investment firm focused on helping owners of industrial technology businesses manage succession planning and ownership transitions. He is also co-founder of the financial education site The Tokenist. Previously, Tim was a member of the Global Industrial Solutions investment team at Baird Capital, a Chicago-based lower-middle market private equity firm.