Financial Planning During a Volatile Market

Anxiety has been high for all individuals across the globe. We are all worried about our health, the health of loved ones, the care of important health care workers and other individuals on the front lines. Not to mention the immediate scarcity of some grocery products (many may never stock their house with less than a month’s supply of TP again), potential loss of income and, finally, the state of investment accounts.

Now that I have you all worked up, let’s review the current financial planning situation. Does this market drop derail all of the financial plans we have been working hard to achieve? Not likely. When we put together a long-term financial plan, the planning software looks at 1,000 different sequences of past returns. So, drops like we have recently seen are expected.

Bear markets are common throughout history. The chart below maps out bull and bear markets since 1932. In fact, we have been very fortunate to enjoy the longest bull market in history since March 9, 2009. 2019 saw very strong market returns. Despite the sharp market drop, the S&P 500 closed the quarter at a price we last saw in January 2019. That is not that long ago.

“Buy low, sell high” is a common investment quote. Now is a great time to consider putting cash to work. JPMorgan put together numbers that illustrate the return opportunities if we are to return to the market high from price levels at Friday, March 27, close. The numbers show the annualized expected return. If it takes us one year to return to the recent market high we would achieve a return of 35.2%. Even if it takes five years to get back to the recent market high, we would achieve an average annual return of 7.9%.

For clients who are retired, or are looking to retire soon, keep in mind that you do not need to withdraw and spend every dollar of your funds right away in retirement. There is time to recover. Staying invested is very important in this situation. For many retirees, you may be investing these funds for at least another 10 years. For recent retirees, you may be looking at another 30 years of investing.

While focusing on the long-term is extremely important, there are some key financial planning steps that can be taken now to ensure your financial plan has the best opportunity for success. A few items that I am looking at for clients include:

• For clients who need cash this year it is important to make sure there is a level of cash available to take care of these needs. While we are likely to experience recovery from these levels, there may be additional volatility over the next six months. We don’t want to be stuck in a situation where we have to “sell lower.”
• Buying at these levels is certainly an option. A less dramatic way than buying is to rebalance accounts to take advantage of lower prices. Rebalancing will shift funds from relatively better performing bonds, or cash, toward stocks that fell harder in price.
• . There are likely to be holdings in your account that may have losses at current prices. By harvesting, or selling securities to realize losses, you can offset gains in other assets you may prefer to sell and possibly report tax advantageous losses on your tax return.

Financial planning is an ongoing process. Long-term financial plans are there to help guide us to long-term goals. What happens in the short term can provide opportunities to strategically manage these plans over time.