Buy, Sell or Hold: What to Do or Not to Do with Investments (think GameStop) During Divorce
The financial news outlets are always talking about the next hot stock. “Buy this stock, or you will regret it” or “It’s time to dump this stock; it’s done for!” When listening to the 24-hour news loop day in and day out, it’s hard for many investors not to feel a bit of FOMO (fear of missing out) when it comes to the markets.
So, what does this have to do with divorce?
Imagine your friend or loved one is going through the divorce process, and their spouse wants to cash in on these stock headlines. Their spouse sells out of their current diversified portfolio and takes their chances on GameStop and AMC stock. As one might imagine, a couple of different outcomes could result.
The stocks drop dramatically in value, and now their marital estate has been reduced significantly. Will their settlement now be dramatically reduced because of this shift, or will the courts say their spouse is liable for making a risky investment?
Now imagine the reverse is true. Their soon-to-be ex-spouse bought and sold those stocks at the exact right time, and now their marital assets have tripled in value. Do they now have the right to claim all the gains as theirs alone, or will your loved one’s settlement be significantly increased because of this stroke of luck?
The answers to these questions are complex, so it might help to look at how assets in divorce are split in general. This will give us guidance on how to navigate investment decisions during divorce. Of course, it is very important to speak with an attorney about each specific situation and state laws.
How Assets are Split in Divorce
Depending on where your friend or loved one and their spouse live, marital property is divided either as:
- Community Property, or
- Equitable Distribution
In community property states, a court would typically award property equally between spouses, basically giving each party a 50/50 share of each asset in the marital estate. There is much less leeway when it comes to awarding one spouse more for circumstances such as wasted funds.
In equitable distribution states, courts have the authority to divide a marital estate so that it deems fair (or “equitable”) given the circumstances. The courts in these states can award one spouse a larger settlement due to the circumstances at hand. For example, in our example of the GameStop stock trader, the courts may award a larger share of the losses to the spouse who decided to trade. However, all the supporting facts need to be considered.
What Investment Changes Can Be Made While Divorcing?
The divorce proceedings will determine most of the changes to your friend or loved one’s finances. So, while it may be tempting to start trading on a hot stock tip, unless your friend gets express consent from their spouse, it may be best to keep things intact in their portfolio. They should also talk to their attorney. Often courts prefer finances are kept “status quo” during the divorce proceeding.
Some couples do decide to split some accounts before finalizing the divorce. However, there must be a clear understanding that this is happening by all parties, including the attorneys involved. While it is more common that no major movement of money or shifts in portfolio occur during the divorce, there are many cases where couples agree to make changes as the financial markets evolve, such as during the financial crisis in 2008 and spring of 2020 (due to COVID-19).
Communication is key. A court is more likely to charge a spouse with losses if the other spouse clearly communicates an objection to putting the marital property at risk by investing in volatile investments.
Clearly Communicate Risk Tolerance
If your friend or loved one’s tolerance for risk is more conservative than their spouse’s, it is important that they communicate that to them. Make sure their spouse knows they do not want any major changes to their portfolio during the divorce. They can protect themselves further by getting access to their accounts and reviewing them periodically. And finally, they should make it clear to their divorce team what their wishes are with their investments.
If you have a friend or loved one going through a divorce, email TheNextChapter@bdfllc.com to get access to The Next Chapter or our ClearPath for divorcing individuals, which will help them navigate the entire divorce process.
Jenny Chung, CFP® is a Wealth Manager at BDF. She uses her background as a teacher to help individuals and families understand their investments and financial plans. She also works on the firm’s Divorce Practice Group which helps divorcing individuals navigate through the process. Jenny earned a master’s degree from the University of Illinois and has over 20 years of experience working in financial services.