Lessons Learned: “This Time is Different”

May 5, 2020

The COVID-19 outbreak has created stress and uncertainty in all phases of our lives. Worrying about our family’s health, learning to work from home while trying to educate and entertain children, and watching our income decline or for some completely go away has understandably caused many to panic. This stress and panic can lead many to make rash decisions that can lead to future regret.

In speaking with several agency owners last week, I could hear the stress in their voice and a couple owners uttered the words, “this time is different” when discussing the prospects of their investment portfolios. I agree the market stress created from the coronavirus is different than past market corrections. When looking back at Black Friday (October 1987), 9/11, or the Great Recession we can conclude that the causes for market dislocation and future uncertainty were all different yet the best course of action during those times were very similar.

Maintain a Diversified Portfolio

If you have a solid financial plan, you most likely have a diversified portfolio that is built to withstand the market volatility. Although a diversified portfolio doesn’t outperform the market in bull markets, it does not drop as far in down markets. As illustrated below, sticking with a diversified portfolio will provide you with a smoother and less stressful return sequence.

Source: Morningstar as of 3/22/20. *Performance is from 8/1/2000 to 12/31/2000 to more accurately reflect the time period encompassing the previous two bull and bear markets. **Performance is YTD as of 3/22/20. Diversified Portfolio is represented by 40% S&P 500 Index, 15% MSCI EAFE Index, 5% Russell 2000 Index, 30% Bloomberg Barclays US Aggregate Bond Index, and 10% Bloomberg Barclays US Corporate High Yield Index. Past performance does not guarantee or indicate future results. Index performance is for illustrative purposes only. You cannot invest directly in the index.

 

Rebalance
When you are shopping online and find a pair of shoes that you have always wanted goes on sale, you are more likely to buy the shoes if the discount is great enough. Stocks are currently on sale and we need to apply that same mindset to rebalance your portfolio back to the target allocation. If your target stock allocation is 60% and the market has taken you down to 55%, you should be buying stocks and selling bonds to get your allocation back to target. What if the market keeps dropping? That could happen but looking back at past markets rebalancing too early often leads to higher performance than not rebalancing at all. This is illustrated below during the great recession.

 

Tax Loss Harvesting

Having been sequestered in our houses for the past few weeks, many of us have cleaned out garages and closets throwing out items no longer of use. Taking that same approach to our investment portfolio, we want to throw out our investments that are worth less than we paid for them; or said another way, sell the investment, take the capital loss, and swap into a different security that provides similar market exposure.  The end result is you have a tax loss to offset capital gains and you remain invested in the market to capture the upside of the market when it recovers. These capital losses will be very valuable in reducing future taxes should you sell your agency or another asset at a capital gain.

Yes, unfortunately “this time is different.” The coronavirus has created previously unimaginable challenges across the globe and more specifically in each of our lives. However, now is not the time to panic and sell out of your investment portfolio. We should learn from past market corrections and act on the volatility to position ourselves better for the recovery.

BDF’s Commercial Insurance Practice Group understands equity compensation and the valuation of a business and uses this knowledge to help insurance professionals develop financial plans while minimizing tax bills. Whether working with a producer or business owner, we focus on one’s individual goals, family involvement and living a full life.

Jim King, CPA, CFP® is an owner and wealth manager at BDF where he leads the Commercial Insurance Professionals Practice Group. He uses his understanding of the insurance industry to help insurance professionals maximize their prime earning years, develop a discipline around saving those earnings and put a plan in place to best utilize assets. His focus on creating financial blueprints for his clients has earned him recognition as a “Five Star Wealth Manager” by Chicago Magazine.