I can remember watching the New Year’s Eve Times Square Ball drop like it was yesterday. A new decade arrived. People were dancing in the streets. Everyone was full of hope and promise.
Then a global pandemic hit. Times Square now looks like a ghost town. It’s like aliens came down and stole all the people (and the hope and promise).
These are truly unsettling times. The COVID-19 virus has now infected over 3.0 million people worldwide (and counting). People are literally afraid to breathe when they go out.
We are over a month into this pandemic. Most businesses are still closed. Workers are still at home. And the economy is nowhere near close to reopening. So it’s understandable if you’re concerned about your finances.
I wrote a post at the beginning of the year to get people motivated. My goal was to share my best ideas to help you make 2020 the best it can be. Then the COVID-19 pandemic turned the world upside down.
Has my commitment to you changed? Absolutely not.
People today are even more stressed out about money. Some are facing the pressure of lost wages. Others are dealing with major disruptions to their business. And many are seeing their retirement savings shrink.
Stressful situations make people prone to mistakes. So it’s more important than ever to keep you on the right track. And that’s what I’m committed to do.
Independent Advice is also an Essential Service.
I’ve experienced several market cycles during my twenty years in the business. I’ve also seen the different emotions people go through. They range from extreme overconfidence to extreme fear.
An important part of my job is to help clients control their emotions. I see myself as a behavioral coach, providing advice on what to do, and what not to do. And like all good coaches, I try to keep people focused and on the right track.
It might be hard to believe, but last year was an example of extreme overconfidence. Company profits were mostly flat in 2019, but stock prices went up. That meant investors paid more and more for the same level of profit. The S&P 500 alone was up over 30% in one year.
To me, it was like seeing a house in your neighbourhood being flipped. Imagine a house sells in the spring for $500,000. Then it sells again in the summer for $575,000. Then it sells again in the fall for $650,000. (Same house, 30% more expensive.) In this example, you’re happy that prices are going up in your neighbourhood. But you’re probably suspicious of how fast prices are going up, too.
I became suspicious of the stock market a few years ago. Was it because I saw a global pandemic brewing? Of course not! Nobody saw that coming. But I did see some negative trends developing.
Low interest rates allowed debt to ramp up everywhere. And it wasn’t just consumers who increased their debt loads. Many corporations piled on debt, too. Higher debt levels made households and corporations more vulnerable to a shock, which made me uncomfortable.
Also, low interest rates led to higher prices for almost all assets. Families got into bidding wars over homes. Corporations bid up stock prices through share buybacks. Private equity companies bid up prices of all kinds of assets. Sky high prices made it harder to make good investments.
That’s why I became more defensive with my client investments. What did my average client portfolio look like before the recent downturn? As of December 31, 2019, over 92% of my assets under management (AUM) were invested in globally balanced portfolios with a low to medium risk rating.
Also, many clients had a good dose of cash in their portfolios. High interest savings accounts ranked fifth in terms of AUM as of December 31, 2019.
(As an aside, advisors earn next to nothing when clients hold cash. That’s why your bank is quick to call you when they see a large cash balance in your account – they want to sell you something that increases the bank’s profit. A fiduciary will always put your interest first, even if it impacts their bottom line.)
How did my clients do in the first quarter of 2020? They certainly were not immune from losses. But their balanced portfolios and cash gave them better downside protection during the worst of the downturn. Most accounts were knocked back to where they were in early 2019. Not a bad result all things considered.
It’s normal to take a step backwards sometimes. But you need to be ready to take two steps forward.
Looking forward
Now the mood is extreme fear. So where do we go from here? Like I said, a big part of my job is keeping people grounded and on the right path. That’s why I’m a big fan of planning. A plan keeps you focused and moving forward.
The markets will likely remain volatile for months, as the world deals with the consequences of the crisis. Having no plan puts you at a huge disadvantage! So here are some ideas to help you better prepare for these turbulent times.
1) Find your focus with the Financial Planning pyramid
Need a plan but don’t know where to start? The financial planning pyramid is a useful tool that can illustrate where you are and what you need to focus on.
The planning pyramid is based on Maslow’s Hierarchy of Needs. According to Maslow, humans need to take care of their basic needs (i.e. food and shelter) before they can achieve any higher level needs (i.e. creative activities).
The idea behind the planning pyramid is the same: You need to take care of your basic financial needs before you address any complex topics. The general rule of the pyramid is to start at the bottom and move up, rather than trying to do everything at once. That helps you focus on building a plan with a strong foundation.
A reason why some people get frustrated with their financial situation is because they skipped the basics. For example, saving $100 a month in a TFSA is great. But if you’re relying on credit cards to pay your bills, you might be paying more than $100 a month in interest costs.
Cash flow should be top of mind for everyone today. Several government programs were introduced to help individuals during this pandemic lock down. Banks have also introduced many programs to help individuals manage their cash flow.
2) Reassess your risk tolerance
Once you have a handle on your cash flow, move on to risk management. Most stock markets have rebounded from their extreme lows. This gives you an opportunity to review your investment risk tolerance.
Your risk tolerance is the amount of risk that you are comfortable taking, or the degree of uncertainty that you are able to handle. We all want high returns from our investments, but we’re all constrained by our attitude towards risk.
The speed and size of the recent market drop might be a wake-up call for you. Ask yourself:
- Did the market drop keep you up at night, or did you see an opportunity?
- Did you sell thinking that stocks will go down further, or did you buy thinking that the market will rebound?
If you had a sharp negative reaction to the market downturn, you need to revisit your investment plan. Having a plan is important, but having the wrong plan is dangerous. So make sure your plan is one that you can actually stick to.
How do you figure out if your plan is right for you? The best way is to work with an independent advisor. A good advisor will learn your unique situation to build a plan that’s right for you and your family.
Alternatively, you can use an online risk assessment questionnaire. These questionnaires can help you allocate your money between the major asset classes: cash, bonds and stocks. Of course, there’s no guarantee that any particular asset allocation will meet your objectives. So consider the results as a broad starting point. That’s why I recommend using a trusted professional.
3) Diversification works
Like I mentioned in my post from earlier this year, I was excited to build on last year. But I also recommended balance:
“Don’t get me wrong. I’m not telling you to double down on real-estate or the stock market. Nobody can predict what these markets will do over the next year. And like everything in life, you have to keep things in balance.”
My Best Advice for 2020. (January 2020)
For most investors with a diversified portfolio, the market storm has been scary, but manageable (at least so far). Bonds in most portfolios went up during the downturn as investors fled to safety. That offset some of the declines in stocks.
Also, balanced portfolios benefited from rebalancing. Rebalancing means getting back to your target allocation by selling your top performing assets to buy ones that have fallen in price. This process forces you to follow the golden rule of investing: Buy low, sell high.
Many balanced portfolios rebalanced during market lows. That gave them a tailwind when stocks rebounded. I still recommend keeping a globally balanced portfolio.
Finally
I hope you and your family stay safe during this difficult time. We will get through this, stronger than ever.
I’m still committed to helping you make 2020 the best it can be. You may have taken a step backward, but a good plan can help you take a giant leap forward to better days.
If you have any concerns about your situation, feel free to reach out to me. I’m always here to help.
**This piece was originally posted on Provident Wealth Financial. Re-posted here with permission.
