Weathering The Storm

Written by Erik Dullenkopf, CFP^®

Reflecting on the many recent client conversations I realize that it is important in times like these to appreciate the preparation done to prepare for this “storm.” As you know, one must do the good work preparing for a coming storm before it arrives (and we know one will someday), even if you don’t know when or how severe. Although every client’s financial picture and goals are very different, we can still highlight the common steps taken to fortify our clients’ custom financial plans. These are the results of much time and numerous meetings over the years working alongside our clients.

Financial Planning.

This is an ongoing process, not one act, looking at the big picture and evaluating if your current financial path is likely to get you to your desired destination. Throughout this process clients have made smart decisions that has laid a firm financial foundation and afforded them to live within their means.

Portfolio Construction.

Done appropriately will consider one’s current risk/return preference and amount of time until it is used to fund its goal. It will be built for the long term, not gambling, and will consist of time tested products. The result is a collection of investments that work together as a whole to provide for reliable growth.

Communication.

This goes both ways to ensure correct perspective, realistic expectations and to foster education. The actions above cannot be accomplished without frequent, open exchanges of thoughts & feelings.

For many of our clients who are already retired, continuing to fund their monthly income needs is a priority. Having to sell investments after they have decreased in value, especially early in retirement, can have a negative impact on long term portfolio balances. However, for many, there is comfort in knowing that much of their monthly income needs are satisfied by the dividends and interest their investments produce. Unless this becomes a significantly protracted bear market then the amount of investments that need to be liquidated could be small. Thereby allowing the same amount of shares to rebound afterwards. However, should markets stay depressed for the longer term, often times the impact to a portfolio can be lessened by turning on other dormant sources of income, like Social Security, pensions or annuities. The last resort would be to temporarily reduce withdrawls from the investment account.

Moving forward, we all need to remember that there are things that we can control, and things we cannot. As Warren Buffet once said, “Be fearful when others are greedy and greedy when others are fearful.” This crisis and accompanying bear market does provide for some opportunity. For some those may include one of the following:

• Tax loss harvesting / in non-retirement accounts, assets can be sold at a loss and be used to offset gains in the future
• Roth Conversion / transfer assets at a depressed value from your pre-tax IRA, pay income taxes on that amount, deposit them into your Roth IRA and let the assets appreciate tax free there.
• Dividend reinvestment / Let the dividends or interest earned by your investments reinvest to by more of those investments at these lower prices.
• Invest surplus cash / if you have cash savings surplus to your emergency fund needs and can set aside for the long term, buy investments now at lower prices.
• Rebalance / Over time some of your investments will grow faster than others. Sell some of the investments that did well recently and buy back into the ones that didn’t. You will effectively be buying low and selling high.
• 401(k) contributions / If employed and cash flow still allows, continue to contribute to your retirement plan.

Remember that when the stock market is “bad” it is often a “good” time to buy!

“Uncertainty is the only certainty there is, and knowing how to live with insecurity is the only security.” - John Allen Paulos