Financial Planning in a Crisis: Recovery

Picturing a Market Recovery

You may be asking yourself, “When will the market recover?” or “What will a recovery look like and will it be worth the wait?”  These questions seem appropriate.  Without all the answers, let us give you an illustration: the line isn’t straight up, but rather a zig-zag pattern.  Let us remind you that each correction takes different amounts of time to come back, but if given enough time, they do eventually come back.  We can discuss the problems all day long, but unfortunately no one can tell you exactly when it will be.  Looking out, hopefully a year from now we will all ‘look back’ and see that we had another good buying opportunity in 2020 (in other words… increased share prices).  Consider the chart below which illustrates what happened after the Global Financial Crisis in 2008:


To illustrate a sample market recovery, visualize that you are at the bottom of a long staircase that leads to the Capitol Building (maybe 40 or 50 steps) and you need to climb to the top to enter.  As you walk up several steps you run into several others who are blocking your way.  In market-terms, these represent investors who were unable to sell, maybe trapped due to low prices, but now see current prices as acceptable.  As they step off (sell out of the market) you may be forced to ‘step down’ so that they can get by before you are able to pass them.  Get the picture?

As you continue upwards, maybe another several steps, a strong wind comes and causes you to drop a step or two (negative news releases about the economy, or perhaps a company’s revised earnings, etc.)  As the ‘wind’ settles down you regain your balance and proceed.  After a few more steps you are higher and all of a sudden you feel like jogging the next few steps (maybe this is a positive news report, such as a vaccine for coronavirus or a drug to help offset the symptoms).   Again, get the picture?

As you continue, at some point you may stop to catch your breath, and you ‘feel’ like you haven’t made any progress because the front door is still well out of reach.  Then, after a few more steps it starts to rain and you ‘hunker down’ for a few minutes to weather the storm (for instance, the market has stalled and doesn’t grow for a few weeks).  Eventually, however, you know that the sun will reappear, and the rain will eventually dry up (the market starts receiving positive news about the economy and corporate earnings are more predictable).  We could go on and on… as you take few steps up, you also from time to time are forced to take few steps back.

To finish the story, a loud warning speaker announces a tornado warning and you run back down to where there is a small storm shelter (maybe it’s an announcement of a recession that causes you go about half way back down again) and as you enter, you see that a few people are scared the shelter won’t protect them.  Others say that it will take too long and they flee all the way back to the start (and sadly some get blown away).  The next morning is a new day and you start walking upward again.  Eventually you do, despite all the detours along the path, reach the front door and enter the Capitol Building.  Sure, it took longer than you anticipated, but you made it!  As you walk in, you comment, “This is even better than I thought!”  Some friends you know are already there and you enjoy the visit.

We are all on a journey.  The above illustration may seem silly, but it’s representative of the zigs and zags of investing (and of many ‘other’ things in life).  Don’t let the journey, the detours, the ‘weather’, all the noise, etc. discourage you from continuing onward.  Eventually, with persistence (and proper planning) you will reach that goal.

Financial Planning in a Crisis: Cash

Think you need CASH?

During market corrections advisors get calls from clients requesting cash.  This is particularly when the market is having a bad day.  Sometimes it’s for a vacation, or making a large unplanned purchase, or simply deciding to pay off credit cards.  And then sometimes investors will unnecessarily turn “sour” on a long-term investment (during down markets) in order to fund a dream running through their mind.  Do you get the picture?

To preserve one’s portfolio and enhance chances of a solid recovery, we suggest that people not redeem from their investments unless it is absolutely necessary.  An investor’s portfolio should be their ‘serious’ money for long-term goals (retirement, new business, etc.)  If this is your situation, ask yourself “Can I delay this decision?” or “Can I put off this purchase or simply not spend this money?”  Also think through if you are making money by doing this, or possibly costing yourself something that you may not get back?   Many times, unnecessary purchases are difficult to recover from.

During times when you need cash, investors should first go to their checking or savings accounts.  ‘Emergency funds’ should have been established and funded for unexpected needs.  If you have not planned ahead then use this uncomfortable time to revise your plan (maybe through professional financial advice) so you may better handle needs going forward.  Don’t make a bad decision today that you will pay for years down the road.

2020 Market Correction

Several have asked about our thoughts on this market correction. First, we are sad about the lives that have been affected by this virus. Since December 2019, the coronavirus (Covid-19) outbreak has devastated many lives in many different countries. As it relates to the investment community, we have also felt the short-term impact of this virus. However, we believe the markets should recover with hopefully very little effect to our economy. As with other corrections we have seen, don’t be surprised if we potentially see the markets go lower and continue their wild “volatile swings” until things “clean up” and we eventually get back to where we were. Also, don’t be surprised to hear the media report some really “crazy” scenarios that may occur. For the most part we think this could end up being a good buying opportunity for the long-term investor. Many times these types of corrections can propel the market to go higher (dragging in new money at good entry points) once it recovers. So in the meantime, consider other possible benefits, such as declining mortgage rates that can provide excellent refinance opportunities for homeowners. As always, we encourage clients to call and discuss their concerns before making any knee-jerk decisions today that could result in derailing a good investment plan down-the-road.

Dying with “Unrealized” Losses

From time to time investors accumulate “unrealized losses” in an investment.  These are losses that an investor could incur if they sold the investment.  And by doing so, they may be able to claim the loss on their tax return up to annual limits allowed by the IRS.

This is the big issue most people hear little about.  If the investor dies before realizing the loss, those losses will go away and cannot be claimed on the tax return.  The losses therefore could be lost forever.

Let’s look at why this may be important.  For an example, let’s say Mr. Jones is 85 years old and some time ago he bought an investment from his broker that today is valued at $20,000 less than his original investment, or cost basis.  If he sold the investment today he could realize the loss of $20,000.  Mr. Jones can use that loss by offsetting future taxable investment gains, plus up to an additional $3,000 per year of loss deductions.

While a somewhat complicated subject to discuss, be sure to talk this over with your investment advisor and/or tax professional.  If it makes sense to continue to hold the investment, your investment advisor should be able to explain how you can repurchase the investment after 31 days to avoid “wash sale rules”.  Don’t leave deductible losses on the table if your situation warrants taking advantage of some otherwise commonly overlooked tax benefits.


Small Business Owners Building Wealth

We have all heard the typical strategies to building wealth… IRA accounts, investing in mutual funds, stocks and bonds, 401(k) plans, paying down debt, etc.  These are all good strategies.  However, another excellent strategy for many business owners is through the use of real estate.  For this strategy, the business owner needs to own the real estate they use to “house” the business.  Depending on the nature of the business it could be an office, multi-tenant building, warehouse or storage facility, shop, etc.  The benefits can be numerous from enhancing business/employee productivity, to numerous tax benefits and incentives (depreciation, tax write-offs, etc.).  The owner can also possibly experience an increasing real estate value over time to help build wealth for later use in retirement.  As far as the monetary benefits, we have seen some business owners (over the years) add a considerable amount to their personal net worth (in addition to their other assets and retirement plans) by the time they retire.  This strategy may seem huge and overwhelming, but with some good planning and timely advice upfront this dream may become a reality.


A Brief Thought on “Market Timing”

Recently I was reminded by one of my most respected CFP® friends of a quote by Warren Buffet regarding investors overreacting during market corrections.  Karl has a “knack” of giving sound, time-tested financial advice in a very crystal clear way his clients and others appreciate.  Hopefully this will shed light on why investment advisors throughout the country encourage clients to avoid getting drawn into market timing and trying to “run for exit the doors” when markets correct.

The Market is the most efficient mechanism anywhere in the world for transferring wealth from inpatient people to patient people.” – Warren Buffet


Market Update & Perspectives

After days like these in the markets we know people are concerned.  So hopefully these thoughts can help add a little light to something that may seem very “dark” and confusing.

I could bore you with details and go on and on about the possible cause (China’s economy slowing, a strong U.S. dollar, the Federal Reserve possibly raising interest rates in September, the collapse in the oil sector as well as other raw materials, etc.) but remember there typically is not just “one” event that causes this much volatility.

So you may ask what these events (external factors) might have to do with the U.S. stock market.  First, investors and market prognosticators are worried that individual companies that make up the stock market may begin to suffer lower earnings and slower revenue growth causing their stock prices to drop even more.  Additionally, there are some views that these events could cause our economy to enter another recession.

In terms of the U.S. our economy is currently in the best condition around the world.   Economic growth is not robust, but as economist Brian Wesbury says, “we are seeing a steady ‘plow horse’ type of growth.”  And though our oil industry is in the “doldrums” the U.S. consumer and our banking system is in much better financial condition (since 2008).  Other economic sectors such as retail sales, wages and housing starts are experiencing good growth.

In terms of the U.S. consumer we haven’t paid just $2/gallon for gasoline since March 2012, and unemployment is much lower with more Americans back at work today.  And regarding China… keep in mind that our exports to China only amount to 0.7% (less than 1%) of our economy.

As I am writing this today, the U.S. stock markets have just rallied to close up over 600 points (almost 4% on the day) from recently being down approximately 12.5% from their annual highs.  History tells us on average that we experience a 10% correction every 18 months (although the last was in October 2011) and 5% corrections occur as much as 4 times every 12 months.  Also, looking at the calendar August through early October is typically a bad time in the market.

So is there a positive in all this… yes!  There has been lots of money sitting on the sidelines waiting for lower prices to enter the markets.  These type of swings in the stock market are “buying opportunities” for new money that has been waiting for a good entry point.  During times like these investors can step in and “buy bargains” which also brings new money in to help support stocks.  After a period of time markets typically recover and go on to set new highs.

Our suggestion?  Step away from all this “clutter and noise” and try not to react.  Remember what you voiced when you started investing… a long-term perspective and that you realized markets would fluctuate (go up and also go down).  Research tells us when volatility kicks in, this is typically the time investors make “poor” investment decisions and suffer the consequences for years.  If you simply have the urge to try to “fix it” or you can’t handle what’s going on, then get professional investment advice now.

Remember we are here to help.  Please call us if we can help you or someone you know.