Planning Amid Uncertainty

April 30, 2020

In times of heightened volatility and uncertainty, it’s helpful to revisit the fundamental question of why we plan and invest in the first place.  As the COVID-19 pandemic continues to unfold, we will continue to see significant and wide-ranging implications on many aspects of our daily lives, businesses, and communities.

The financial markets, too, have seen significant volatility this year.  In the past several months we experienced an abrupt market decline that proved to be the fastest descent into bear-market territory (a price correction of 20% or greater) in the history of the S&P 500.  This steep decline was then followed by a very powerful rally, which included the best consecutive 15-trading-day stretch in the history of the S&P 500.

Given the volatility in both our daily lives as well as the financial markets, it’s an ideal time to take a step away from all of the headlines and revisit your core planning goals and objectives.  After all, we save and invest for a purpose and each family may define success differently. Outlining what success looks like with a clear roadmap helps make decisions based on long-term priorities rather than the day-to-day market volatility.  This planning process provides a data-driven framework from which to make decisions, taking the emotion out of the financial decision making.  Ultimately, we want to ensure that clients’ financial assets are aligned with — and supportive of — these stated priorities.

So, what types of analysis have we found most helpful in the current environment?

It starts with a review of core planning goals, which help define why we save and invest for the future.  Often these goals include, at a base level, building sufficient assets which can generate cash flow for a comfortable and fulfilling retirement.  Many clients are motivated to help provide education and other experiences for their family and provide a leg up in life for the next generation.  Other clients have specific charitable goals to support organizations most meaningful to them.  Whatever your priorities may be, it’s important to have a written plan detailing these goals and priorities.  That way, you have well-considered values and priorities to help drive decision making, regardless of the current news headlines.

Once families have taken the time to articulate their values, goals and priorities, there are several ways that we can test the viability of achieving these stated goals.  It starts with updating a client’s balance sheet and cash-flow picture.  We use statistical modeling to then test the probability of achieving these goals, based on the current pool of assets and future needs.  We incorporate both optimistic and conservative forward assumptions about market performance and other client assets. This produces a range of possible outcomes over the course of our client’s lives.  The analysis helps us craft a plan that achieves success under a variety of possible scenarios.

After spending time updating goals and objectives, part of the planning process is also to revisit how we apply risk to financial assets and to ensure that the current strategy is still appropriate.  One primary method of assessing portfolio risk is to review portfolio asset allocation — or the mix of stocks, bonds, and cash — that comprise a portfolio.  The value of having an appropriate amount of more stable assets like cash and bonds is certainly highlighted in times of volatility.  Positions in more stable assets not only reduce the volatility of an overall portfolio, but also give clients the confidence to hold more volatile growth-oriented assets like equities in periods of market stress.  It’s also critical to make sure there is an appropriate allocation to risk assets to ensure clients have enough growth assets to preserve purchasing power and support financial goals over the course of their lifetime.  The nuance comes in striking the right mix of assets. Several factors should be taken into account such as personal risk tolerance, time horizon, as well as the investor’s broader financial picture, business assets, legacy and family goals, and other factors unique to each client’s situation.

We may recommend any number of adjustments to a financial plan during the process.  Goals and objectives may shift over time, and we also must consider the changing landscape of financial markets and legislation.  We may revisit a Social Security filing strategy or suggest a change to the mix of accounts a client uses to generate income.  The passage of the SECURE Act in late 2019 and the CARES Act this year have both presented unique planning opportunities.  The rules governing qualified retirement accounts, for example, have seen significant changes in both pieces of legislation.  Market volatility also may present a good opportunity to revisit a strategy around managing long held concentrated stock positions, or potentially to rebalance a portfolio.

Ultimately, planning and investing should reflect a client’s own risk tolerance, goals, and objectives.  Times of market volatility can be useful to revisit core values and the reasons why we invest, and to make sure the current strategies align with these objectives.  At The Fiduciary Group, we believe its important to customize investment portfolios to take into account each of our client’s unique set of circumstances and preferences.

Feel free to reach out to our team today to discuss building a plan tailored to your own needs and circumstances.

AUTHOR:

MICHAEL McLEOD, CFP®