Don’t waste the crisis: Zoom in on your health and wealth
By Jeff Bernier
It’s a rare moment in history where I can safely say that it is a rough time for everyone, everywhere.
With our ‘new normal’ changing almost daily, it is easy to get wrapped up in the never-ending news cycle. But assuming you’re at home where you should be, most of the news is not actionable (checking once or twice daily should be more than enough). Instead, consider using this unusual time to take concrete steps towards improving your health and wealth. In other words, “Don’t waste the crisis!”
It’s a great phrase, but I can’t take credit for it myself. Back in 1976, M. F. Weiner wrote an article in the journal Medical Economics titled, “Don’t Waste a Crisis—Your Patient’s or Your Own.” His article urged physicians to use every medical crisis as a unique opportunity to help improve a patient’s personality, mental health, or lifestyle. Since then, the phrase has been widely adopted in the worlds of economics and politics. In both cases, the meaning is the same: a crisis presents opportunities that are often overlooked, so don’t waste it!
As the need to ‘socially distance’ continues, most of us are now homebound. Whether you’re working from home or not, it’s likely you have more free time than usual. Instead of getting sucked into the news or social media or an endless Netflix binge, I recommend getting hyper-focused on these three things, starting today:
- Your physical, spiritual, and emotional health.
This may seem obvious—we are in the midst of a frightening pandemic, after all. But now is when we need to go deeper than simply doing all we can to avoid the virus. Whether you are in self-isolation or full-on lockdown, take time to enrich your physical, spiritual, and emotional health in ways that can be a challenge to fit into your normal daily routine. Eat well, exercise, and get sufficient rest. Take more space for prayer and meditation. Enrich your mind by reading some great books. Learn a new skill. Journal. Visualize and document your long-term goals and pursue them with passion.
- Your portfolio.
“Don’t do something. Just stand there!” This old quote from Jack Bogle, the founder of The Vanguard Group, stressed that the worst thing investors can do is fall victim to the opposite advice: “Don’t just stand there, do something!” Why should you resist the urge to act? In a multi-decade financial plan, inflation—not stock market volatility—is your largest long-term risk because it reduces your purchasing power. Your best defense against rising prices is adequate equity exposure. Remember that your strategy was built to address your needs, goals, and tolerance for risk before today’s chaos, and nothing has changed since. That means that this is not the time to rethink your investment strategy. Watching the market drop and your portfolio shrink can feel scary, especially when the drop happens at such a rapid rate. But keep in mind that expected returns are now much higher than they’ve been in years, and you are in this for the long game. Have faith in the future. Be resilient and patient. And move forward with the same discipline you had during the glory days of the bull market.
(The only caveat: If you need liquidity due to a job loss or other change in your financial life, then let’s talk now about your best next steps.)
- Your financial plan.
Of course, your financial life includes much more than just your portfolio. One way to gain a better sense of stability in an uncertain environment is to control what you can. In 2008, I sent out a list of 10 actions to consider in a volatile market—all of which still hold true today. (Yes, even now, some things remain predictable!) Here it is again, slightly updated to fit the current situation:
- While the pandemic is anything but normal, today’s bear market is a NORMAL part of the economic cycle.
Remember that your time horizon = your life expectancy. At 70, your life expectancy may be 20+ years. At 60, it may be 30+ years. At 40, it may be 50+ years. During each 20-year period, a recession, market correction, or bear market is likely to occur multiple times and in an unpredictable fashion. This too shall pass!
- Your financial planning goals should dictate your investment policy.
The stock market has changed direction, but it’s likely that your financial planning goals have not changed in the past month. If that’s true, then the allocation of stocks, bonds, and cash in your portfolio should still reflect your needs. If your goals have changed, a policy change may be in order, otherwise, use your Investment Policy Statement as your ‘seat belt’ as you ride this roller coaster—and turn to us for a holding hand if you need it!
- Rebalancing your portfolio may be prudent.
While your Investment Policy Statement is unlikely to change, that doesn’t mean you should forego wise adjustments to your portfolio, including rebalancing your portfolio (including your 401(k) accounts). Rebalancing may give you an opportunity to sell certain asset classes (such as bonds) that may be overvalued and add exposure to asset classes with more compelling valuations (such as equities).
- Low interest rates may make this an ideal time to refinance your mortgage.
To help combat the economic impact of the pandemic, the Fed has cut interest rates to zero, which has pushed mortgage rates to historically low levels. However, rates are extremely volatile right now. Your financial advisor and mortgage specialist can help you evaluate your break-even point (what rate you need to make the move worth your while) and help you decide if refinancing is a wise strategy. Also keep in mind that if you do refinance, it’s usually best to try not to extend your term; regardless of the low rates, being debt free in retirement is ideal.
- Reducing discretionary spending may be wise to shore up liquidity or purchase stocks at ‘discounted’ prices.
During economic slowdowns—especially one as dramatic as the present shutdown—job loss is a reality for many. To ensure you can leave your portfolio intact during the financial ‘valley,’ it may be necessary to reduce your discretionary spending to increase your cash reserves. This strategy may also provide funds to take advantage of lower equity prices. Expected long-term returns for equities have improved significantly and are now much higher compared to bonds. If you can, consider increasing your savings into your Roth IRA, 401(k), and other investment vehicles. This may also be a wise time to do a Roth conversion; by converting now when markets are lower, you may be able to pay taxes at a discount. And even if you don’t have the liquidity to increase your contributions, maintain your regular contributions to your retirement accounts if at all possible. Again, don’t waste the crisis!
- Dollar cost averaging can help manage your risk.
If you have significant capital that is available to add to your long-term portfolio, this may be a good time to begin getting that money back to work. Some of the highest returns are earned when investing during recessions. However, if you are concerned about the risk of investing in the current market, consider dollar cost averaging. By investing a certain amount monthly over a 12–18 month period according to your investment strategy, you can balance out the risk of market volatility. The method does not ensure against a loss or guarantee a gain, but it can help you invest at a time when it feels a little scary but expected returns are higher. The key is to have a plan!
- Your short-term portfolio is designed to support your lifestyle during the downturn.
If you are taking distributions from your portfolio, it should already be structured to include a short-term ‘bucket’ that holds about two years of distributions in cash equivalents and short-term bonds. This not only supports your lifestyle during this (and any) downturn, but it also enables you to keep your long-term portfolio allocated to enable growth—all driven by your financial plan and personal Investment Policy.
- Price and value are inversely related.
It may not feel intuitive, but in reality, the market is safer after it has gone down and riskier after it has gone up. (Mkt ↓ Risk ↓ Value ↑ and Mkt ↑ Risk ↑ Value ↓) That means that the greatest opportunities come when the market is at a point of maximum pessimism. Baron Rothschild, an 18th-century British nobleman and member of the Rothschild banking family, is credited with these words of wisdom: "The time to buy is when there's blood in the streets." If you can, heed his advice!
- If you have stock options, exercising them now may offer tax-savings opportunities.
While we almost always recommend exercising non-qualified stock options when you plan to sell, today’s market offers a unique opportunity to exercise and hold your shares. The reason: Because the taxable value of your options is likely lower at the moment, and the lower the price, the less tax you pay. Note that exercising options is not a wise action if shares are ‘under water’ and worth less today than your exercise price. Of course, there are many factors to consider, so it’s always best to talk to your advisor first before exercising your options.
As the impact of the coronavirus continues to unfold, know that our team at TandemGrowth is not ‘wasting the crisis’ either. Yes, we are working from our home offices, but we are working diligently to help our clients create clarity and confidence—even during what is arguably the most unsettling crisis any of us has faced to date. We remain committed to our investment philosophy and continue to be guided by our 10 fundamental investing principles. We are available to meet online or over the phone, and we encourage you to reach out if you have any concerns at all. We are happy to schedule a review of your portfolio, answer specific questions, or simply talk.
This a difficult time for all of us, but I am confident we will get through it together. The economy and the markets will recover—eventually. In the mean time, we will continue to focus on managing the things that we can control. As we navigate this crisis together, our team at TandemGrowth prays that you and yours remain safe, happy, and healthy.