Control What You Can

Gerald D. FaheyApril 13, 2020

COVID-19 Related Information

Erratic market cycles can sometimes trigger erratic investor behavior. During times of market stress or societal challenge, history has shown repeatedly that we should resist the urge to exit the market and invest only in cash. This temptation and topic are naturally on the minds of clients during turbulent market cycles, such as we have had since mid-February of 2020.

Nobody enjoys looking at account statements when portfolio values are down – that includes our clients and the financial planners or advisors you are working with. What if you are near, at, or have just recently entered retirement? Maybe the quarterly real estate or tax bill just arrived, and you must raise the cash from somewhere to make the payment.  The fact is, there is never a good time for account values to decline. Unfortunately, most, or all of us have experienced negative market cycles during our lifetime – chalk it up to just human nature that we react more strongly to the negative ones than the positive.

For some perspective, when we partner with clients to create a financial plan or build an investment portfolio, we use historical performance of investment returns or projections with Monte Carlo simulation as a guide for our recommendations. Since our recommendations are at least partly based on historical data, they would naturally include some challenging and negative figures from past years.

While we cannot control everything relating to our financial lives, there are many details that we can. If you are near retirement in a declining market cycle, while you cannot control the market – you can control how much longer you work. You could work another year or two to offset a period of negative market performance. If you have just retired and the economy is slowing or market stressed, part-time work for another year or two will help to ease the transition, while you earn some added income or enjoy employer-paid health insurance benefits? Doing so may allow you to defer collecting Social Security benefits in exchange for higher benefits in later years.

We spend a lot of time with clients, especially in the beginning of the relationship, to develop their “target” asset allocation, based on tolerance for risk. With a target allocation, our goal is to determine the right mix of stocks, bonds, and cash inside the portfolio. The target is the result of conversations and meetings with the client and determining their goals and objectives, prior to investing any money. After initial investment, rebalancing may be necessary at times, due to market conditions and fund performance. The crucial point here is that the target allocation should be maintained throughout all market cycles – whether good, bad, or flat. This is another aspect of control that an investor has and if market declines are extremely uncomfortable, it may be a sign that a new “target” is appropriate.

While today’s financial planning software is sophisticated in its scope, it does not know anything about family history or lifestyle. As such, even though in financial planning we use industry standards such as life expectancy to age 90 – perhaps your situation is different. Living longer may be a blessing but can also present a challenge to sustainability of assets. With inflation (3%) and longevity combined, there is a need for growth over a longer period, to support purchasing power against rising costs. You can manage longevity by working with your advisor/planner to develop a customized plan to address this issue. In some cases, a solution could be a slightly higher allocation to stocks or keeping a more aggressive target for a few years longer before scaling back to a more conservative approach.

Many families have a household budget to some degree and may have little or no room to reduce expenses for basic needs. However, especially during times of market stress – it may be worthwhile to reduce or defer discretionary expenses. Here again, we could exercise some degree of control by postponing expensive vacations or a new car purchase, considering domestic travel instead of international, or delaying the kitchen renovations another year or two.

Market volatility can be stressful for all of us. While the capital markets and government policy are not under our direct control – there are several other aspects of financial planning that are. We are here to help you navigate through all market cycles! Please reach out to your advisor or a member of the HFA team if you would like to talk further.


See website disclosures