Managing Money and Risk in the COVID-19 Era
“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” - Warren Buffet
Clients and friends,
Before I go into any talk about financial markets I’d be remiss to not mention that health is far more valuable than money. I hope everyone is following the suggestions of medical experts with regards to social distancing and avoiding unnecessary travel. I hope you’ve found a few great books to read and are able to enjoy the company of your loved ones. I hope you, your family, and friends are all healthy and remain that way.
The past few weeks have been rather unprecedented, and while I’m confident normalcy will resume, it’s hard to know if that will happen in 2 to 4 weeks or 2 to 4 months (or longer). Without knowing precisely when good news will re-emerge, it’s important to remain calm and follow instructions for social distance, rather than panic and feed the fire.
Financially speaking, it’s okay to have concerns. Most people have seen their accounts decline and with the stock markets wild daily moves, it’s easy to think it will never stop.
While I’m not a medical expert and cannot offer unique wisdom on physical health, I wanted to share some of the ways we’re working to help clients with their financial health (which, turns out, can be pretty important to our mental health).
Starting with a Financial Plan
Managing investments is just one element of financial planning. A financial plan takes into account each person’s unique goals and objectives, along with their ability and desire to take risk. By starting with a financial plan we’ve already assumed there will be some bad years, such as the start to 2020. While no financial plan can forecast why there will be a bad year (such as the novel coronavirus), it is something that we know will happen, and something that we plan for with clients.
The current stock market declines have been sharp but are still within the assumptions of most financial plans. Should this become an outlier (a decline outside of statistical modeling) we’ll want to update financial plans to ensure we’re still making the smartest decisions.
Being a balanced investor
Along with financial plans, we like to make sure all clients have a mix of investments that is appropriate with desire and ability to take risk. This means we ask a lot of questions about how you might react to things like the stock market and portfolio declines. Based on the answers we craft a mix of investments designed to produce long term results that are desirable, without taking shorter term risk than is palatable.
This generally results in a mix of stocks, bonds, alternatives (like real estate and gold), and cash. In 2020 this has served clients well. While the S&P 500 is down 22%, most clients with balanced to conservative portfolios have fared much better. Most are down, but being down 5% or 12% is far easier to recover from than being down greater than 20%.*
*Example only, actual client results will vary based on holdings owned, deposits and withdrawals, and other factors
Having a risk management plan
At our firm we use a number of investment “formulas” to help us make smarter financial decisions. This is where the name of one of our companies comes from, FormulaFolios.
Throughout the year we run statistical tests on market data to make sure we are using what we feel are the most appropriate investments to help clients reach their goals. We also are measuring risk to help us determine if we should reduce (or even eliminate) our exposure to higher risk asset classes (like stocks) at certain times.
That’s a mouthful, so more simply put, we are watching data to see if it makes sense to lower the risk for clients almost every day. This is part of our risk management plan. In 2020 we’ve already made a few such adjustments to help reduce the risk clients are taking with their money. For example, many of our 60/40 stock to bond allocations have already been reduced by 10% or more, making them more like a 50/50 stock to bond allocation**. This helps lower stock market risk, and in most cases, minimize how much we drop when the stock market drops.
We are continuing to watch market data daily and may make additional adjustments in accordance to our risk management plan. Just keep in mind that we manage risk like a dimmer switch, not a light switch. This means that we change risk gradually instead of suddenly. This helps reduce over trading of accounts, which creates unnecessary costs, taxes, and doesn’t effectively help with risk management.
**Example only, each client allocation could be unique so actual implementation of our risk management plan may produce different changes to your asset allocation.
Staying calm
It’s a natural reaction to want to fix something when it’s not working. With investing though, markets have been going up and down since the beginning of time. This is a sign that they are working, not that they are broken.
In the 20 years I’ve been working in investment advisory there have been many 20% stock market declines for many reasons. This is unique because it is the first to be caused by a global health pandemic. In all prior declines they were caused by different, but also unique concerns.
With the benefit of hindsight, we know that if we had a balanced, risk appropriate investment plan going into a decline, we would have been rewarded by simply staying calm and keeping with our investment plan. Nobody has timed the market correctly, and more often than not those who try end up selling after the decline and getting back in at higher prices down the road.
If you are worried and have questions, or just want to talk and get some reassurance, please let me know. You can reach me via email, phone, or the contact form here. It’s a privilege to be of service, especially in times such as these.
Best,
Jason
