Coronavirus Edition (what else?)
The last few months have presented a rapidly changing financial landscape for those in the investment management, financial planning, tax return preparation and tax advice world. In a series of fits and starts, the following took place:
- The due date for filing tax returns and paying balances normally due on April 15, 2020 was moved to July 15, 2020.
- The above "extension" applies to estimated payments for 2020 due on April 15, 2020 but left the second quarterly payment normally due on June 15, 2020 still due on that date. Later advice was provided, the due date for the second estimated payment is also "extended" to July 15th.
- The Required Minimum Distributions (RMDs) from retirement plans has been waived for 2020. This seemed to create (and most practitioners concluded it did create) an opportunity to roll 2020 IRA distributions already taken back into the account under certain circumstances. A) you had 60 days from the initial distribution to roll the funds back in, and B) you cannot have made another rollover transaction within the previous 12 months. Since the bill was signed on March 27th, that essentially applied only to distributions after January 27th, with that deadline stepping forward day by day. Initially there was some reticence among practitioners to do the rollback since it was not explicit in the CARES Act language but implicit in the removal of the RMD requirement. Fairly quickly, though, consensus emerged that the rollback could be done if the two conditions enumerated above had been met. Now, a less compelling consensus seems to have formed that the rollback could be applied to any distribution on or after February 1, 2020, and the deadline for restoring the funds is now July 15, 2020. This last bit remains unclear. Check with your tax advisor.
Needless to say, these abrupt changes have created a good bit of thrashing.
That is not all. Check with your tax advisor about Stimulus rebates of $1,200 per taxpayer plus $500 per qualifying child and increased Charitable deduction limits. Business owners check on Payroll Tax Credit refunds, Employee Retention Credits, special provisions for coronavirus-related retirement plan distributions, and delay of 2020 required contributions for single-employer plans until 2021.
This financial market downturn has been the most abrupt in recent memory and is the third of its kind in our company history. The dot com bust lasted 36 months from March 2000 through March of 2003. The scope of that downturn was modest, and somewhat offset by bond yields. The "Financial Crisis" of 2008 - 2009 started in mid-2007 with the signs of weakness ---- topping out of the real estate market which had been driven somewhat by the widespread use of homes as cash registers. This led to the Lehman failure, the AIG failure, Merrill, and on and on. The relentless downside of that time was heart wrenching. We reached that bottom on March 9, 2009. The shared fear at the time made the prospect of loading cash into the market almost inconceivable. Even though the market had bottomed, no one knew it at the time. It was not clear until months, years later that March 9th was the bottom and the market would rise pretty steadily from there. So, while in retrospect, it is clear that buying in on that date would have been great, few humans had the steel nerve to do just that. But if you stayed in the market all along, you owned the assets at the bottom and you will have been rewarded with the recovery. In a way, the only real cost of that is the anxiety of enduring the downside.
Every step along the way in a downturn is as painful as you let it be. It is a choice. You can focus on it every day, and agonize over every 500 point or 1000 point drop in the Dow, you can subtract one day's balance from the previous day's balance and calculate the dollar decline, or you can build a mental context around what is happening and what you ought to do about it to take it in stride. Here are some points of context:
- In the risk/return trade-off we evaluated in the design of your portfolio, this, now, is the risk side. You cannot have one without the other, and what is happening now, this, is why the portfolio produces the expected return it does. This risk is short-term. The return side is long-term.
- We knew a significant downturn would happen. We just didn't know when or why or how much. We designed the portfolio around an examination of probable loss scenarios and we said clearly that it will happen. We did not say maybe, or it could, or it might happen; we said it will. Now it is here. We planned for this. We designed the portfolio to accept this event.
- The recovery is not likely to be as abrupt as the downturn, but it will happen. It will happen in jumps and quick bursts. The history of financial markets tells us this is so. Part of the reason to stay invested is that for each step in the decline in prices, the expected return on those assets goes up and the incentive to own the assets increases. We will not know in advance when the market jumps will happen. Another part of the reason to stay invested is to make sure you participate in the rapid upswings.
- The urge to try to market-time your way through this can be powerful. Sell on the way down and buy in at the bottom, right? Well, history and experience tell us that is not what happens. The sell on the downside part is kind of easy. It is a surrender to the fear impulse. It is the buy in at the bottom part that is tricky and very unlikely to happen. The same fear impulse that led to the sell-out on the way down will almost certainly make the market-timer wait until he/she is "comfortable" that the market has "stabilized". That point will not be reached until the market has exceeded the point where the sell-out occurred (meaning the timer sold low and bought high - bad outcome). Market timing is a fool's errand. History and experience tell us it is a loser’s game.
- If you have extra cash or it is time to rebalance, a downturn like this can be an excellent buying opportunity.
We are profoundly grateful to be working with the clients we have. From talking with other similarly situated advisors, we know the folks we work with are far above average in wisdom and perspective and self-awareness when it comes to navigating this market experience. Further, we are honored to be in this role for you at this time. We believe this is when we do some of our most important and most impactful work. It is a privilege. Please be assured we welcome your call. Even though we do not hurriedly call each and every client to fuss and overreact each day the market declines and encourage them to worry, we know and understand this is a difficult time. Most of the time, the simple act of verbalizing the fears will have the effect of mitigating the intensity. We are here to help you process this. It is part of what we do.
Reminder to get your quarterly Credit Report from: TransUnion
The table below shows the returns through March 31, 2020 for selected investment asset classes. In most cases, the results below are appropriate benchmarks for the related mutual funds in your investment portfolio.