Investments

Connecting From a Distance: Focus on What You Can Control

9th April / 2020
Connecting From a Distance: Focus on What You Can Control

This is the first installment of a weekly series of short pieces intended to provide you and your family with some insights on navigating these remarkable times in the financial markets and our world in general.

As we have all witnessed over the past month, the financial markets can be volatile and unpredictable, with prices often moving without explanation on a day-to-day basis. In the past six weeks, we have seen the global stock market (MSCI ACWI Index) fall over 30% and stage a 20% recovery, with a breathtaking number of +/- 5% daily moves1. When markets gyrate between fear and greed in such an extreme fashion, we think it’s important to focus our attention on the elements of investing that we can each control.

Here are a few to consider:

Know Your Plan

A good financial plan is built around your family’s specific circumstances and goals. Your plan should address what you intend to spend in the next few years, and what things you are hoping your wealth will allow you to accomplish in the more distant future. In dramatic markets like those we’ve seen recently, it’s important to remember your plan should include the assumption that significant year-by-year volatility in the stock market is normal. It’s also important to remember that your plan likely includes sufficient reserves in cash and high-quality bonds to use as near-term sources of funds, allowing you the freedom to wait patiently for your stock investments to recover without being forced to sell them today.

Spread Your Bets

No one knows which sector or geography of the stock market will recover first. Will it be real estate companies or technology companies? European companies or American ones? We think the best antidote for unknowable questions like these is diversification. Investing your portfolio in thousands of companies, across all sectors and countries of the global stock market, ensures that some of your assets are invested in what will be the best-performing corners of the market, while also ensuring that you haven’t concentrated your bets in what might be the future laggards.

Make Some Lemonade

While we can’t control the gyrations of the market, there are ways to turn environments like this one into benefits. One way is by “harvesting” any material losses in your stock portfolio. Selling these securities can create capital losses that may be used to offset capital gains in 2020 or indefinitely thereafter. But it’s important not to let the proceeds of such sales sit idle in cash; they should be re-invested back into a different fund that is not substantially similar to what you sold, but still keeps you in the market and following your plan. Beyond income taxes, the current environment might also provide an opportunity to save some money by refinancing your mortgage and/or use the combination of depressed market values and low interest rates to engage in wealth transfer transactions that might benefit your family for generations to come.

Push Back Against Your DNA

It’s natural to want to run from fearful situations. After all, our ancestors learned to avoid fire and flee from predators, allowing them to survive and prosper. But in the world of investing, making an undisciplined bolt for the exits can have dramatic negative consequences for the long-term. If you sell your stocks now, you only have two possible future paths: You can stay out of the stock market forever, which, while emotionally satisfying in the short-term, will likely result in significantly lower long-term returns. Alternatively, you can try to time your re-entry to the markets. We think this is a difficult and dangerous approach, because we know from history that there is always something to worry about in the stock market. Thus, many who wait for the “uncertainty to end” will never re-invest, or may do so at exactly the wrong time in the future. We think following your plan with discipline is likely to be a far more successful approach to achieving your long-term goals.

Source: Yahoo Finance

Important Disclosure:

Advisory services provided by TFO Phoenix, Inc. Information was obtained and collected from a variety of public resources. We believe this information provided here is reliable, but do not warrant its accuracy or completeness. It is provided for informational purposes only, and should not be construed as legal or tax advice, and should not be considered an individualized recommendation or personalized investment advice. Laws may change pursuant to the administration’s legislative agenda. Always consult an attorney or tax professional regarding your specific legal or tax situation. TFO Phoenix, Inc. is not engaged in the practice of law.