What do I do with my investments in a pandemic? Does COVID-19 change my investment strategy? How does Coronavirus change my financial plan?
Thanks for coming back for the latest edition of Planning for your Purpose, Telos Financial’s blog, where I discuss different topics related to financial planning. CERTIFIED FINANCIAL PLANNER™ professional Dennis LaVoy is Plymouth, Michigan’s financial advisor serving clients throughout the mitten as well as across the country.
The primary purpose of the blog is to introduce financial planning concepts and questions I receive from clients that I believe are important. I want to start discussions that will educate, benefit, and improve your financial life, ultimately, to help you focus on your telos!
Downturns are a common feature of equity markets (equity markets include things like the Dow Jones Industrial Average or the Standard and Poors 500 Index). Volatility, uncertainty, and a bumpy road are expected. How should investors react during the toughest times in the markets? Should you stop investing during the COVID-19 or Coronavirus pandemic? Do you need to change your investments? Should you change your long-term goals to adjust for the Coronavirus?
These are common questions that I get a lot and am getting regularly right now. It makes sense too. The last few weeks have been bad for long term investors. Last week was a record bad week for long term investors in the markets. We had the worst single market day in over thirty years. The markets take notice of the news and tend to overreact; now that news is more readily available, the market’s overreaction is more pronounced. Because the COVID-19 or Coronavirus pandemic is unlike anything we’ve seen in our lifetimes is creating a non stop flow of negative information.
Because all investing advice is unique to you and your financial plan, it’s impossible to give precise guidance in a general blog. If you want to talk about your personal plan, contact Dennis LaVoy with Telos Financial today. As always, consulting a financial professional for advice that applies specific to your situation is one of the best ways to get clarity on investments. If you are a DIYer, consider an hourly planner or make sure you’ve done your research and are comfortable with the risks involved.
For purposes of this blog, let’s assume you’re a long-term investor with a long time horizon, an aggressive leaning risk profile (tolerance and capacity), and you have a diversified portfolio.
Should I stop investing now that the markets are down due to the COVID-19 or Coronavirus pandemic?
The short answer is no, probably not. If you are investing at a fixed period for a long-term goal, it probably doesn’t make sense to stop investing.
I understand the thinking here, markets are falling, things are bumpy, perhaps you’re saving to your 401k or Transfer on Death (TOD) or other non-retirement account and you want to sit out investing for a while because you feel like every dollar you put in is immediately gone. My answer is no. If you have the time to ride out the dip, keep on investing. If you are an aggressive investor, I’d even encourage you to put extra cash on in or increase your monthly savings. I wouldn’t recommend compromising your emergency fund or sacrificing your lifestyle to do it, but if you can afford to, buy more.
One way to think of this is buying on sale. If you thought the markets were fairly priced a few months ago before the COVID-19 or Coronavirus pandemic triggered correction began, then it follows that now they are “on sale” for however far the market has fallen. Last Thursday, March 12th, the Dow Jones Industrial Average closed down over 25%. If you had been shopping for a shirt and now it was available for 25% off, you’d probably buy it now since it’s cheaper than it’s been. Equity investments are the same. They will take time to get back to their “fair” value, but it will happen.
There is, of course, risk involved here. The markets could fall further. Maybe 35%, 40%, 50%, or more. No one knows what will happen or how far it will dip. Historically what we’ve seen is a strong recovery from these dips and return to “normal” levels.
My accounts are down 25%, do I need to change my goals?
That depends. . . were these longer-term goals? For example, if you are 35 and saving for retirement at 55, probably not. Based on historical corrections, you’ll have more than enough time to make back what you’ve lost plus more. It is worth monitoring, but volatility is normal and unless something is different this time, you will probably be fine.
I would recommend reviewing your financial plan, assumptions, and projection to make sure everything is in line and on course, especially if you feel like it was tenuous before. It’s always good to make sure things are on course and doing what you expected them to.
If you have short term goals and the funding for those was in equity investments, you may need to make changes to your goals or goal funding. Again, any changes will depend on your goals and the time horizon for those goals, but if you wanted to retire in a year and all your savings in down 25%, you could be in trouble. It would depend how big of a cushion you had to ride out a dip, your risk tolerance, time frame, other goals, etc. In short, if you have a short-term goal that was set to be funded by investments in equities, it’s a case by case basis. There’s not a simple answer to this, aside from that’s why we do financial planning. One of the ways I help clients prepare for short term goals is to make sure the funds needed in the near term are invested in ways to minimize volatility and possibility of losses. Remember, with reduction of downside risk comes loss of potential upside, your financial planner will advise or help you decide what’s right for you.
What if I lose all my money? What will I do?
Investing in the markets involves risk. Tough times, like during the COVID-19 or Coronavirus pandemic, are risky times. That risk is rewarded by the possibility of gains. One of the core tenets of financial planning is assessing risk tolerance, risk capacity, and risk need.
Can you lose all your money in the stock market? Absolutely. Nothing is guaranteed. However, it’s unlikely based on history. You would have to invest only in companies that go bankrupt. In the 2008 recession, how many companies went bankrupt? A few for sure, General Motors and Lehman Brothers come to mind, Bear Stearns was acquired by JPMorgan Chase or it would have. Several companies received federal loans (aka bailouts), which saved them. The point is, very few companies actually folded, resulting in total losses. The rest of the companies went down in value, then came back and the investors who held their shares experienced a large paper loss on statements, but when it came back, so did their account and share value.
This time, as with every time, could be different. Maybe a lot of companies will fold this time. No one can predict the future. That’s where the risk and reward calculation comes in. That’s why we do holistic financial planning, to analyze your tolerance and capacity for these risks.
If you’re invested for the long term and have the stomach, time horizon, and financial well-being to ride through a down turn, you’ll probably be better off for it. That is, if the future repeats what we’ve seen in the past. If you don’t have the ability to ride out a downturn, you probably shouldn’t be invested in the equity markets anyway.
Should you be concerned about COVID-19 or Coronavirus pandemic and how it will affect your portfolio? Of course, but you should also have a financial plan that accounts for market volatility and your financial goals.
Financial plans are an effective tool in helping to understand your time horizon, risk capacity, and risk tolerance. If you’re unsure how much risk you are taking or should be taking, consider creating a financial plan. It’ll help give clarity to these questions, along with many other financial related questions.
Make sure you talk to your CERTIFIED FINANCIAL PLANNER™ professional or tax advisor about this. If you are a DIYer, make sure you spend the time to understand tax ramifications and planning to optimize your savings for your income and financial goals.
If you’d like to discuss your financial situation or create a financial plan, Telos Financial welcomes the opportunity to talk with you. Contact us today to schedule a free introductory meeting and we can talk more in person. Telos is a financial planning firm serving Michigan’s high income and high net worth millennials, recent college graduates, and small business owners.
Telos Financial is a fee based, holistic financial planning firm located in Plymouth, Michigan serving young professionals and their families. Dennis LaVoy is a Certified Financial Planner® Designee and a Chartered Life Underwriter®. Telos is proud to be a firm based in Michigan focused on serving high net worth and high-income young professionals, millennials, and those preparing for retirement. Dennis LaVoy founded Telos Financial and to provide fiduciary financial services to families across Michigan including Plymouth, Canton, Ann Arbor, Detroit, and as well as all over the great United States of America.