Financial Planning and Market Update 03/22/20

Dear Clients and Friends,

As the dimensions of what we are living through are becoming clearer, we’re all searching for answers and ideas about what to do and how to think about what’s happening. Here at DFG we’re trying to keep up with the torrent of information and opinion. As of this moment, most of the experts we read suggest that the recession that is now a reality will probably be “U” shaped – a steep decline in economic activity followed by some bottom hugging, to be followed by a recovery, now generally assumed to be spurred by the development of a vaccine or therapeutic drugs – perhaps in the first half of 2021, possibly sooner. In terms of how we live our lives, it seems like an eternity. But in general terms we need to assume a framework based on the best information available to us, and at this time this appears to us a reasonable assumption. So, based on the best information we have, here are some suggestions and ideas we take away:

1. Have a Plan! As always, the best antidote to wandering in the wilderness during these moments of loss and change is having a flexible, comprehensive financial plan that allows you to keep track of your financial activity and on a continual basis make changes in a way that allow you to see how they affect your long term prospects. This of course is what we do here at DFG – it allows us to assess the potential effectiveness of different strategies and products and takes the nerve-wracking guesswork out of decision-making. Our planning clients agree that having this kind of framework is what is helping them through this moment – for those who don’t, there is no better time to put one in place, and we are ready to work with you.

2. Recovery begins in 2021? An important assumption is that once we have survived the descent of the “U” (historically that has come in several stages) and lived through its bumpy bottom, there will be an economic recovery as we pick up the pieces, and get back to some kind of new normal. Equities that have fallen in value will eventually begin to recover, and that recovery could be sharp and dramatic. Investors who have resisted the urge to sell their stocks while they were plummeting 38% in 2008 were well rewarded — in three plus years the market recovered that loss and has gone on to more than triple in value, even with the dizzying losses of the last two weeks!

3. Preserve Growth Potential in Retirement Assets. Perhaps the most important takeaway we have is this: With the assumption that the market will likely rebound eventually, we can think about current retirement assets that are properly allocated in a new way: We have counseled our clients not to draw income from their retirement accounts (IRAs, 403s, 401s, etc.) until they are required to, now at the age of 72, and then to the extent possible to withdraw only what IRS requires, their RMD (Required Minimum Distribution), which starts at about 4% and goes up a little each year. That is a good way to support the value of their investments and to keep taxes they pay on that retirement income to a minimum. With this strategy in place, then, the equities in their retirement portfolios (because they are not liquidating them for income before retirement) can be left there to recover as the market rebounds. Because they are not drawing from them, or liquidating them out of a sense of panic, actually they will not have not lost anything – the only “losses” will have been on paper. And for those clients IN retirement who are already withdrawing their RMDs, if they have a properly diversified portfolio of bonds, cash and stocks, they can take their income from the asset classes – i.e., bonds and cash – that have not suffered losses, thus sheltering the stock portion of their portfolio so that it can recover as the markets do. This simple strategy can go a long way toward protecting portfolio value in a most effective way. This plan should help maintain a longer-term perspective and has the ability to calm the nerves of even the most nervous investor!

4. What is to be done? There are many different views about “what can or should be done now” to existing portfolios and financial plans. For some, this could well be an opportunity to reassess risk profile and make some changes at least going forward. Rebalancing existing portfolios now may seem logical, but most analysts we hear say that attempts to rebalance portfolios now are futile in that they are already “self-rebalancing” as stocks drop in value and the percentage of bonds increases. For others, this is a time to cease making retirement plan contributions ONLY or IF there are other more urgent needs for that capital. Others might be drawn to tactical allocation strategies going forward that build in systematic ways to rebalance portfolios. This could be a time for some to consider Roth conversions – taxes would still have to be paid, but on a balance lower than before on its way potentially to growing back to its original size and beyond. For those with high levels of embedded capital gains, it is an opportunity to sell some things and book the losses for use later to offset gains. But in the most general terms, anything that involves selling/liquidating equities at this moment essentially is turning a paper loss into a permanent one, perhaps never to be recovered. It’s the classic “selling low” and later “buying high”, the opposite of what anyone wants to do.

5. These are times of enormous opportunity. For example, there is a relatively new kind of financial instrument that is tailor-made for times like these. These instruments (offered and guaranteed by substantial blue-chip insurance firms) are based on the entry point in terms of the values of equity indexes (S&P 500, Russell 2000, MSCI EAFE, etc.) and while protecting the initial investment (from 100% to 10%, depending on risk appetite) against losses are able to capture up to ALL percentage gains in those indexes over a number of years, usually three or six. We have been VERY busy the past two weeks as our clients are choosing to protect their current position while participating in the market (it works for transfers from existing retirement or non-retirement investment accounts or cash. The strategic advantage of doing this now is that the markets are low, and the potential that over the next six years for example that they will see significant growth are very high. The other thing that has had us “hopping” is the spiking interest in other guaranteed products, especially insurance-based products. For example, cash value whole life insurance for those who are insurable and have a genuine insurable interest can now be extremely attractive, with guaranteed competitive tax free internal rates of return, tax free cash distributions through policy loans, estate planning benefits, and a high degree of natural “leverage” (through death benefits). While for some a “boring” use of capital in the “go-go” years, it is now again becoming a sought-after option.

So while we are living through a scary time that we will never forget and be studying and analyzing for decades to come, we hope that our clients are able to take a long view of what is going on, and, as suggested above, even find ways to benefit from comprehensive planning and the emergence of instruments meant to help them keep themselves protected and their savings safe while still being positioned for future growth.

Given the scale and sweep of what is happening, life as we know it likely will change forever, in far more than economic terms. Movements and shifts already underway will be accelerated, and things never anticipated will appear. Here is an interesting article that summarizes what those changes could look like:
https://apple.news/A9-yIRjUIQeu5NbwfsOrElw

In addition to the financial matters we have been addressing, and the abundance of health news and mandates you have been inundated with, we wanted to take a moment to encourage everyone to take time out and attend to their overall health and wellbeing. For example, walks in nature, as we all know, can be restorative — we know the importance of fresh air and exercise in general – staying healthy and balanced is crucial as we face this pandemic. Here is a helpful link for our Pioneer Valley clients to the Kestrel Land Trust’s website to see trails around the Valley to enjoy https://www.kestreltrust.org/connect/explore/. We also know the importance of fresh food and ways to safely shop, and we wanted to share a link to ways to shop locally and support our local farms through CISA (Communities Involved in Sustainable Agriculture) https://www.buylocalfood.org/covid-19-updates-from-cisa/

I’ll close with my new salutation inspired by my parents’ generation that describes a practice that has already found its way into our routine – Vash ayere hent, un blaybt gezunt, Yiddish for “Wash your hands, and stay well!” We’re all isolating, washing, and wishing you well as you make your way through this strange new world. We are here for our clients, fully functional and connected, and are eager to speak personally with you and do whatever we can to help you get through this crisis and beyond. And of course, if there’s anyone in your life you think may benefit from our help, please do give them our contact info. We are a local Valley business and rely on referrals as our lifeblood.

Thank you in advance.

Allen Davis, for the Davis Financial Group Team

Allen J. Davis, CFP® ChFC
Financial Planner and Advisor
Davis Financial Group, LLC
10 Bay Road, Hadley, MA 01035
(413) 584-3098 x11 office
(413) 427-2782 cell
(413) 584-0160 fax
www.davisfinancialgrp.com
ajdavis@davisfinancialgrp.com

Due to the escalating COVID-19 situation, we have suspended in-person meetings and visits to our office to protect our clients, employees and the greater community, and to do all we can to flatten the curve. That said, we remain fully staffed and capable to conduct all business remotely via phone, email, web conferencing and paperless technology and serve existing and prospective clients alike. So please don’t hesitate to call or email us if there’s anything we can do to help you.

We wish you good health and look forward to hearing from you soon.

Our Contact Information:

Allen Davis
Cell (413) 427-2782 email ajdavis@davisfinancialgrp.com
Lou Davis
Cell (413) 374-3565 email ldavis@davisfinancialgrp.com
Joanna Ballantine
Cell (413) 531-4029 email jballantine@davisfinancialgrp.com
Carol Valade
email cvalade@davisfinancialgrp.com
Ellen Carey
email ecarey@davisfinancialgrp.com