Investments

Having a Plan Makes Your Choice Easier

11th March / 2020
Having a Plan Makes Your Choice Easier

As the coronavirus pandemic and related government and private sector responses continue to gyrate the markets, it is natural to feel anxious and even scared about your financial future. The markets, and the world in general, are filled with uncertainty; the fact that no one can ever predict next month or next week makes times like these unnerving for everyone. As it relates to investments, when things get scary in the markets there are really only three possible approaches to choose from:

1. Reduce risk permanently. While these sorts of volatile market environments make it tempting to conclude that you do not want or need as much risk in your portfolio over the long-term, consider the long-term implications of allocating more to bonds:  As of Monday, the 10-year Treasury was at an all-time low yield of just over 0.5%. If inflation averages 2% over the next 10 years, a 10-year Treasury bond holder in a 40% tax bracket will effectively see the after-tax purchasing power of their wealth decline by 1.7% a year for the next 10 years. That is a very steep price to pay in expected “real” returns, and it would likely have a significant effect on the long-term sustainability of the investor’s wealth.

2. Sell now and wait until “things settle down”. We know from past market downturns that there will not be a bell that is rung to signal the bottom. When markets rise next, no one will know if it is just a head-fake to a continued march lower or the beginning of a new long-term upward trend.  If the past is any indication, no one will know where “the bottom” is for months or even years after it occurs. All the while, the media will continue to bombard us with worrisome scenarios that tempt one to stay on the sidelines even as the market recovers. There are likely many examples of speculators who sold in 2008-2009 and never found the resolve to buy back into the stock market, despite its significant gains over the past decade1.

3. Stay the course and rebalance if necessary. As crazy as the markets have been, nothing that has occurred to date is outside the expectations typically embedded in our clients’ financial plans. Those plans generally assume there will be some years with 30% declines in the stock market. After Monday’s steep decline, the global stock market (MSCI ACWI Index) is down less than 1% for the past 12 months. Even if the market declines from its current level, the conclusions of those financial plans should still be valid, which can make a well-constructed plan tremendously comforting in times like this. That said, there is an assumption that is critical to the validity of any financial plan:  That you will stay the course and let the portfolio do its work through good markets and bad. Selling now renders a functional plan useless, as we cannot make any assumption about when the investor might jump back in or how much they might lose permanently during the time they are out of the market.

Having a financial plan that includes the expectation that markets are uncertain and volatile should make your choice between the three paths above an obvious one.  Staying the course and maintaining your long-term target allocation is emotionally challenging, but achieving your personal definition of long-term financial success depends on it.

Important Disclosure:

1Per Morningstar, the MSCI ACWI Index has produced a 106% cumulative return for the 10 years ended March 10, 2020.  This return assumes the reinvestment of dividends. Indexes are not available for direct investment. Past performance is no guarantee of future results.

This communication is designed to be informational in nature and is not intended to be construed as financial advice or a specific recommendation.

TFO Phoenix, Inc. is registered as an investment adviser with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability.