Don’t Just Do Something, Stand There!

The principles of sensible savings and investing are time-tested, perhaps even eternal. The way to wealth, it turns out, is to avoid the high-cost, high-turnover, opportunistic marketing modalities that characterize today’s financial service system and rely on the magic of compounding returns.

While the interests of the business are served by the aphorism “Don’t just stand there. Do something!” the interests of investors are served by an approach that is its diametrical opposite: “Don’t do something. Just stand there!”

                        –Jack Bogle, founder of The Vanguard Group

Well, you knew you’d hear from us this week, didn’t you?? The stock market is extremely volatile and there is much uncertainty around COVID-19.

So let’s take a breath and put things in perspective—as best we can right now. I can still hear Jack Bogle’s voice in my ear as we face difficult times. The quote above is from a speech he made a few years ago—but it still rings true today.

Every inch of you may want to spring into action to take defensive measures as you are bombarded with constant media reports on just how bad it is. As your financial advisors, we want to tell you to resist that all-too-human urge to do something with your portfolio. There are some things you can do and that you can control. But the stock market is not one of them.

If you’ve been investing with us for a while now, you’ll know we are proactive especially when the market is dropping. We have a discipline about how we review your portfolio and think about your financial planning. A market drop doesn’t change that. Our staff works together as a strong ensemble to protect your interests and think about what we can and should do.

Planning Ideas

We can’t control the stock market. We can be disciplined in our approach. That’s especially important in times like these where emotions can run high. Here are a few planning ideas that come to mind that could be beneficial in certain situations:

Remember that with a balanced portfolio, only part of your securities are invested in the stock market.

Sometimes I see clients get caught up in the media hysterics and forget that they own bonds as well as stocks. If the market is down 10%, that doesn’t mean YOU are. You may be down -5% if you have a 50/50 mix of stocks and bonds.

Remember we’ve already planned for bear market cycles

Planning for down markets is already part of what we do. We periodically revise your plans and, if needed, we’ll do that again. But this market downturn is already incorporated in your last plan. That’s part of why that analysis is valuable.

Use capital losses to net out capital gains and rebalance back to your asset allocation target

We will be looking at all positions and if it could help you from a tax perspective, we may take some losses on positions. The losses from selling can help net out gains from selling other positions. Net result is a better diversified portfolio.

Opportunistic buying and selling

Although it’s hard to remember sometimes, market chaos does offer opportunities if you don’t let fear rule your decision-making. Stock valuations were on the high side before this correction. Now we’re looking at better valuations. And as it frequently happens, the market doesn’t discriminate in its downward direction, so some high quality stocks are now priced lower than they probably should be. We like to buy low and sell high in general.

So we take advantage of these times to take some losses if it can help you from a tax perspective as well as buy stocks at a good price (typically in a mutual fund or exchange traded fund).

Review concentrated stock positions you’d like to reduce

Some of our clients have concentrated positions in company stock. We keep inventories that show each lot, the gain or loss, the purchase date, etc. In recent years, we’ve seen most lots have gains. If the client is very tax sensitive, we may have more in that one stock than we’d like in a perfect world.

We will review those concentrated positions to see if there are some lots that now show a loss. We may be able to sell those lots and net out even more shares with gains to get to a more diversified portfolio.

Consider Roth IRA conversions

In some cases, it can make sense to convert part (or all) of a traditional IRA to a Roth IRA. There are lots of rules around this planning idea, so we make sure to consider all the facts. But if we find that it is to your advantage to convert, lower stock valuations can make this more attractive.

If we do a Roth conversion, we can transfer shares of securities from your traditional IRA to your Roth IRA (an in-kind transfer). You are taxed on the value of what you transfer. You should pay the tax with money outside your IRA. When the market eventually recovers, now those shares will grow inside the Roth IRA where you won’t pay tax when you pull money out (assuming you follow the tax rules).

Exercise and hold stock options

If you have company stock options, you typically have three strategies to consider:

  • Exercise and sell
  • Exercise and hold
  • Defer exercise

Exercise and hold can become more appealing when the stock market drops. In this case, you pay the exercise price for the stock and then hold the shares. If they are non-qualified options, you pay ordinary income tax on the spread between the exercise price and the fair market value. When the price is lower, you pay less tax.

But watch out. If the stock price drops below the exercise price, your option will be “under water.” In that case, there is no value in exercising. You have to wait until the fair market price is above the exercise price.

The other consideration is you have to pay out-of-pocket to buy the shares. You’ll need to consider if you have the cash flow to do that. But if you do, this can be an interesting strategy to consider.

Take a fresh look at your Investment Policy

I remember a time I was interviewing Jack Bogle for Morningstar and he was famous for saying “Stay the course.” But when I was talking to him in the context of a market meltdown, he was quick to say “Stay the course assuming your asset allocation is in the right place. If it’s not, rebalance.” Jack didn’t rebalance all that often. But he recognized you have to keep portfolio decisions in perspective.

Much of the time you won’t need to change your Investment Policy. But sometimes people have recently retired. Or lost a job. Or had some other life event that makes them take a fresh look at what their asset allocation target should be.

In general, we set up an Investment Policy so there is discipline in investment decision making. This is one of those times it really helps take the emotion out of market fluctuations. But if you feel there is a need to change the policy, be sure to give us a call. And we will do the same.

Think about cash needs in the near term

If you are going to need a significant amount of money in the next year, get it out of the stock market. We think about this with college funding, buying a new house, having an emergency fund and so forth. This will be a good year to review where you are with your emergency funds and if you need to make any changes.

Control what you can

It’s human nature to want to DO something when anxiety is running high. You can’t control what the stock market is doing. Remember it is NORMAL to have bear markets periodically. We’ve forgotten what they feel like because we’ve been so fortunate to have good stock market gains for many years now. But we almost always have market corrections (down -10%) a few times a year and bear market cycles (down -20% or more) every few years.

But if you need to do something, here are some ideas:

  • It’s tax time. Clean up your files and financial records. You need to do it anyway for taxes. It will take your mind off things you can’t control.
  • Similarly, you should look at how much you are spending periodically. This would be a good time to go through your checking account and credit card statements to see just where your money is going. Whenever I do this, I’m always surprised by something I don’t really need. If the market downturn is prolonged, you may want to think about how to pull back a bit on your spending.

My friend and colleague Christine Benz, Director of Personal Finance at Morningstar, recently Tweeted that she needed to get some tax information from her investment website. She averted her eyes to how her portfolio is doing.

She’s right. Don’t obsess about how much you’ve lost. If you don’t sell, it’s a paper loss. It will recover. We just have to be patient. Remember when we do our financial planning, we build in market downturns. So this is just par for the course.

COVID-19

You’ll note I’ve left this until last. It is very important, but it’s just part of the story right now. We were “due” for a major stock market correction and this is what triggered it. We need to pay attention to what’s happening globally, but we also need to keep it in perspective.

If this is the start of a bear cycle (down -20%+), how long could it last? How bad could it be?

Bear cycles, on average, last about sixteen months. Some are shorter, some are longer. But don’t think that we will immediately pop up this time. We plan for these times. Most portfolios are balanced and if you need cash in the near term, we can always sell bonds if we don’t want to sell stocks. The average stock market drop in a bear cycle is -36%. We are nowhere near that, but don’t rule it out. Again, we’ve considered this already.

How serious is COVID-19?

We’ve sat through many briefings lately, both medical and financial, and the honest answer is we don’t know yet. The rate of infection in China is leveling off. Whether it stays that way, we can’t know. But the rate of infection around the world is still climbing.

We know it will impact most countries economically. When business is slowed to virtually a stop, it will impact GDP (gross domestic product—a measure of the economy). Some countries have better medical systems in place and that can help dramatically. There are firms and academics working on a vaccine, but realistically that may be a year or more away.

Practicing social distancing can help slow the spread of the disease. Use good judgement about where you go and what you really need right now.

What can we do?

First, let’s have compassion for those who are directly affected. Loss of life is tragic and we all want to do what we can to help. Many people will be affected and hopefully most of those folks will recover completely. Hospital capacity may be tested. Medical personnel will need to protect themselves in order to be able to help more patients.

Second, step up your efforts to contain the virus. Wash your hands more often. Buy some antibiotic soap or wipes. If you get sick, don’t be a hero. Work from home. Think about where you plan to travel and use your best judgement. Go to the cdc.gov site to see what they have to say.

Third, don’t panic. This will pass. Focus on what you can control. Be patient, as hard as that can be at times. And remember, as your advisors, we’re here to help. (I know most of you know we’re watching your portfolio and thinking about your planning, so you can sleep at night.)

Fourth, keep your perspective. Yes, the stock market is losing value right now. Interest rates may be low, but your bonds are holding their value.

So as frustrating as it may be to just hold steady and not react, for most people that’s going to be the best answer. There will be opportunities throughout this downturn. We’ve planned for bear cycles in our longer-range projections. When we finally turn the corner, the market is likely to move up very quickly. Let’s not miss that. “Standing there” doesn’t mean do nothing. But it does mean we use discipline and intelligence to find our way in emotion-filled, confusing times.

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The opinions expressed by featured authors are their own and may not accurately reflect those of Buckingham Strategic Wealth®. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2020 Buckingham Strategic Wealth®

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Sue Stevens, CPA/PFS, CFP®, CFA®, CAP®

Sue earned an MBA from the Booth School of Business at the University of Chicago and she holds a master’s degree in wealth management from The College for Financial Planning. In addition, Sue is a Certified Public Accountant/Personal Financial Specialist, a CERTIFIED FINANCIAL PLANNER™ professional, a Chartered Advisor in Philanthropy and a Chartered Financial Analyst® charterholder. Sue founded and led Stevens Wealth Management prior to joining Buckingham. She is also the founder of Stevens Visionary Strategies and previously has had leadership roles at Morningstar, Vanguard and Arthur Andersen.

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