During stressful situations, our brain alerts us to "proceed with caution". That makes sense...if we were cave men or women, it might have saved our lives. Now we are living in a stressful world with the Coronavirus and it is here to stay for the foreseeable future. Having a financial plan in this new reality is more important than ever.
What is the harm in waiting to do financial planning?
We are asked this question frequently. Planning now puts you in a better position to take advantage of market opportunities. If you are considering changes in your life it makes you better prepared to make better decisions. Financial planning provides knowledge and awareness which will eliminate some of the fear and uncertainty that is prevalent during a crisis.
Is it too late to Plan or make changes to my investments?
It is never too early and it is never too late to plan. Of course, ideally you plan sooner rather than later, but even if you get a late start there are many things we can do to ensure that you get on track to achieve your goals.
Yes, but we don’t know what is going to happen with this crazy virus.
Right. Nor do we ever know what the future holds in store for us. That is the purpose of planning…to provide a roadmap during tough times while allowing us to take advantage of opportunities along the way.
So how do you know what to do for your clients?
Since the road ahead is never certain, we advise our clients to build strong balance sheets and appropriate asset allocations for each client’s unique set of circumstances. Once we determine the appropriate investment strategy for the client we stick to it, unless the client’s circumstances change.
Okay, what does a strong balance sheet mean?
A strong balance sheet is a term most often applied to businesses. It often means having enough cash to ride out a period of turbulence and reasonably low debt levels. The same theory applies to personal balance sheets. We do that by developing a cash cushion, reducing debt, making sure expense levels are in-line with income, and making consistent contributions to savings and investments. It means being prepared in advance for the next crisis to come our way.
A strong balance sheet is the best way to make sure that one’s financial well-being isn’t completely derailed in the event of a catastrophe.
After such a crazy time in the markets I have come to realize I need help with managing my money. But it seems “wrong” to move or re-allocate my investments while the market is in such turmoil. What is your advice?
That is understandable. First, let’s address “moving” investments. The reality is that it isn’t always necessary to sell investments prior to moving them. Most stocks, bonds, ETFs, and mutual funds can be transferred from custodian to custodian without selling the position. We provide that information during our consultation with you.
Timing is also an important part of the discussion. Because there is never a “right” time, smart investors “dollar cost average” into and out of markets. A good example of dollar cost averaging is making payroll contributions into a 401k plan. Regardless of market volatility, the investor is making consistent contributions and over time avoiding the possibility of buying into the market at its peak or selling at its bottom.
Re-allocating a portfolio is the action of selling some assets and using the proceeds to buy other assets to gain exposure to different asset classes - with a goal of creating a diversified portfolio. ‘Low correlations’ is why a diversified asset allocation is important. This basically means that some markets are going to zig while others zag. The goal is to optimize the 'ups' but to protect a portfolio from the 'downs'. Determining an appropriate asset allocation takes into account your goals, risk tolerance, need for income, and tax situation.
The constant challenge individual investors experience when managing their own investment accounts is removing the emotion from their decisions.
Well, I lost my job and it is not possible for me to continue to make contributions to my retirement plan.
That’s okay. The question is what can you control? For instance:
I didn’t build up a cash reserve prior to the pandemic and now I am running low on cash to pay my bills. I am petrified to touch my investments because I know you should never sell when the market is down. What should I do?
It is true that you don’t want to sell your investments when they are down because then you miss out on the opportunity to have them recover. However, as long as you have some diversification in your portfolio, you should have a portion of your investments in bonds. Your bond portfolio may be down a little bit, but there is a good chance that some of your bond investments are actually up this year. If you need to raise some cash, this would be a good place to liquidate some positions to build up your reserves.
Okay, but my investment portfolio is a retirement account. Won’t I have to pay a penalty to withdraw the funds since I am under 59 1/2?
The good news is that if the withdrawal is related to the pandemic, the government is waiving the 10% penalty one would normally have to pay if they are under the age of 59 ½. In addition, while you would still have to pay taxes on the amount you took out, if you repay it within three years of withdrawing it you won’t have to pay taxes on the initial withdrawal.
Additionally, if the funds are in a 401k, you can now take up to $100k as a loan against your account versus a maximum allowable withdrawal of $50k before the Pandemic.
There is no doubt that there will be many other questions as people work their way through this period of great uncertainty. Please feel free to reach out to Jenifer at Jenifer@MosaicFi.com with any questions.
Jenifer Aronson is the Founder of Mosaic Fi.