The search for capitulation and what we can do going forward…..

Having a 2 ½ year old at home has allowed me to focus on family during these difficult times.  We have been reading a lot of books such as Princess & the Pea, Even Monster’s Go To School and the like because fairy tales and positivity should be her foundation.  Over in the economy, and specifically the stock markets, however, we should be eagerly awaiting market capitulation to create our foundation in this new economy from which we will grow.    

The markets (Wall Street and Main Street) are starting to digest this unprecedented global event.  While there is no playbook or exact historical reference for the current events unfolding before us, I do know that we seem to process traumatic events in four phases: anxiety, fear, panic and despondence, or capitulation.  While Main Street may still be in panic mode, Wall Street may already be completing the fourth phase now that the government stimulus (CARES Act) has been signed into law. Not to say that things cannot get worse, but I do sense that overall things are starting to calm down.  

The details of the proposed stimulus are still up for interpretation, but a few things are certain.  Wall Street wants to be confident that the plumbing of our economy is intact and Main Street wants to know that the government will not let capitalism fail.  Those are large tasks in my opinion, but I would tend to agree that the CARES Act is a massive step in propping us all up during these uncertain times. From what I can decipher from the limited information currently available is that it will provide a boost to corporate America via loans and assistance.  It will also provide immediate unemployment relief for the more than 3 million people who have already filed for benefits, as well as loosen restrictions and penalties for those that need to tap retirement accounts such as a Traditional IRA, 401k or 403b. As more information becomes available we will clarify any pertinent areas of this stimulus package.  

Over the past several weeks I keep getting a similar question, “Darin, what changes, if any, should I be making?”  My initial response is always to advise clients to stay the course and not make any emotionally-charged decisions. As another financial planner Allan Roth eloquently puts it, “Are we taking on risk by trying to reduce volatility?” In my opinion, ABSOLUTELY.  Once the emotional side has subsided we can actually talk about what sort of moves should be considered during these times of extreme market volatility. Additionally, there is no better time to work on our overall financial health. I know these are tough times, but there are several things we can do to help our investments and pocketbook in the short-term.     

1)     Rebalance:  All investment portfolios should be allocated with more than one investment. Those that have a portion in stocks and portion in bonds would be wise to rebalance. This forces you to sell the over performing part of your portfolio and reinvest in the underperforming portion. During these times that would mean selling bonds and buying equities. Easier said than done, but proven to be effective for long-term investors.

2)     Tax-Loss harvesting within taxable accounts:  These downturns often prompt investors to review their portfolios and sell any investments that they do not want to keep long-term.  Taking a potential loss allows you to off-set future gains. It also allows you to get your portfolio in a much better position going forward.  

3)     Expenses:  There is no better time to tighten that belt and look to go on a ‘financial diet’.  This applies to those still working as well as retired. Now is the time to cut the excess fat from your monthly expenses.  Eating out is an easy one right now so find something else to add to the list. 

4)     Reduction of Distributions:  For those that are retired it would be wise to consider reducing your monthly distributions temporarily.  This would be especially important for those that are exceeding my recommended spend down rate of 4-5%.  

I do not want to underestimate the severity of our current situation.  I have been doing my best to let everyone know that this is serious. However, the time is upon us to focus on solutions and the greater good.  We all need to chip in where we can to help heal this situation.  

Please educate yourself on how to stay safe and healthy.  Take this opportunity to spend some quality time with family.  Reflect on what is truly important. Good will come from this, it always does.

Until next time….

Darin

PS:  I am glad Avery does not have online access to her 529 college savings plan account.  It does not look great right now, but I keep adding ‘her allowance’ to it every chance I get.  

PPS:  As I was finishing up this post I got an email from one of my clients with the following. Thanks Maureen and Sue, I couldn’t help passing it along.

The following is the philosophy of Charles Schulz, the creator of the 'Peanuts' comic strip. You don't have to actually answer the questions. Just ponder on them…..

1. Name the five wealthiest people in the world.

2. Name the last five Heisman trophy winners.

3. Name the last five winners of the Miss America pageant.

4. Name ten people who have won the Nobel or Pulitzer Prize.

5. Name the last half dozen Academy Award winners for best actor and actress.

6. Name the last decade's worth of World Series winners. 

How did you do? The point is, none of us remember the headliners of yesterday.

These are no second-rate achievers.  They are the best in their fields.

But the applause dies.  Awards tarnish. Achievements are forgotten.  Accolades and certificates are buried with their owners. 

 Here's another quiz. See how you do on this one:

1. List a few teachers who aided your journey through school.

2. Name three friends who have helped you through a difficult time.

3. Name five people who have taught you something worthwhile.

4. Think of a few people who have made you feel appreciated and special.

5. Think of five people you enjoy spending time with. 

 Easier?

The lesson:

The people who make a difference in your life are not the ones with the most credentials, the most money, or the most awards. They simply are the ones who care the most.