| March 17, 2020
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It’s unfortunate but it isn’t until times such as these that both the experience and expertise of those guiding your finances and financial plan are so closely evaluated.  The problem is that almost anyone can call themselves a financial advisor or financial planner.  However, seeking a higher level of competence requires finding an advisor that has been certified in areas that are meaningful to you such as financial planning, retirement planning, estate planning and most importantly risk management.  At RZ Wealth, amongst our team, we share the CFP®, ChFC®, CLU®, CRPS®, CRPC®, AIF® and AEP® designations. 

Experience and expertise are key in maintaining perspective and understanding risk in its variety of forms.  Various risks may affect the overall success of your plan and materially impact the asset allocation needed to successfully fund your plan.  It’s important to understand the reality of investing.  Yes, there is certainly a greed factor where the opportunities in the stock market are compelling.  However, determining your appetite for risk should require considering historical facts, the current reality and your absolute need for risk based on your objectives.  I have included a link to Ibbotson charts which go back to 1926 and detail the returns of Stocks, bonds and inflation.  Historically, the only asset class that has dramatically beaten inflation, especially on an after-tax basis, is stocks. Also, of note, is that as holding periods of stocks are increased, the likelihood of loss is diminished and that is why stocks have historically been the correct choice for the long-term risk of inflation but the wrong choice for short-term investing and funding short-term needs. 

Ibbotson Charts

Now we are in nearly a 0% interest environment against the impact of a rising cost of living, this is a losing proposition.  Senior citizens are especially at risk in a low interest rate environment where health care costs which are at nearly double the cost of living rate comprise a larger share. The reality is that other asset classes don’t work against the long-term effects of inflation and it is for this reason that most of us are compelled to endure market risk in a successful financial plan.  Those that are either very wealthy or those living modestly may be able to avoid market risk in their financial plans but these are very rare instances.  The choice for many of us is includes being highly conservative and in all probability running out of money, for us to take the market risk necessary to achieve our goals against an inflationary environment, or for us to modify our goals and live a very modest lifestyle with less chance of leaving a legacy for our loved ones. 

Experience matters in the sense of having lived and worked through major historical market corrections and bear markets and successfully navigating clients through to a recovery in those markets.  In my case, I began my career in 1986 and experienced my first market crash on Black Monday, October 19, 1987.  That day still holds the record of the Dow Jones Industrial Average’s largest percentage loss ever, nearly 22%.  Similarities between 1987 and now include computerized program trading which was new back in 1987 and just as relentless in the sense of speed and drama as what we are witnessing now.  Media coverage sparked panic as the public was pounded with news highlights which were purposely sensationalized for readership.  Today we are bombarded with daily market broadcasts with dramatic headlines to evoke emotion and viewership. 

Our current bear market set a record for its speed and intensity as well as the Dow’s largest point loss and its second largest percentage loss in a single day.  The threat of a global Pandemic is terrifying from a health perspective, but as social distancing rules are imposed internationally, the risk will impact corporate earnings and the financial markets have certainly taken notice with a vengeance!  It is increasingly obvious that there will be a global downturn and potential for recession.  Once the health fear subsides, negative earnings are in line from industries that will either be shunned such as travel, lodging, etc. to industries that are seen as non-essential and will suffer from a consumer that has either lost their income or spending with much more restraint. 

For now, we are seeing widespread panic and losses in every sector and thousands of companies as people rush to the exit to bail out of the financial markets.  The market is typically early in how it prices stocks for potential earnings and we may have already passed an oversold situation on many stocks that prove to be resilient and profitable in this environment.  As an example, Kimberly Clark closed slightly positive today, toilet paper, anyone? We will see strength and positive earnings in other consumer staples or defensive companies along with utilities, communications, streaming companies and companies that are focused on health care that will support the efforts and treatment of this illness and eventually a preventative vaccine and cure. 

A short time ago it was impossible to find losses that we could harvest for tax purposes. Panic has overruled sensibilities and its unwise to follow herd mentality into panic selling.  In markets such as these, it is important to remember who you are as an investor and what habits did you follow to get here.  Consider taking losses on positions that may not benefit from a world that has been temporarily closed for business and may either pay a low dividend or a dividend that could be cut due to a lack of earnings.  Although these are extreme circumstances, prior to this your asset allocation should have been customized to your risk tolerance and financial goals.  The question that should be asked of your planner is “how much risk is necessary to achieve my goals?”  There are robust planning tools that we use to forecast out a client’s probability of success in retirement in consideration of their lifestyle. 

As I have said earlier, the time to have had a better sense of your risk exposure has already passed since your initial asset allocation should have been determined correctly at its onset.  When appropriate, if you can eliminate risk and still seem positioned to achieve your goals, then do cut your risk.  On the other hand, if your goals are at risk and you can’t take the pain and dread of market volatility then look to modify your lifestyle and objectives to allow for a more conservative asset allocation.  As always, we are here working to face reality and position you for success and for the lifestyle you have chosen.  Should you have any questions or concerns, please don’t hesitate to call.  In the meantime, we are proactively calling all our clients and setting up conferences to review their accounts, tolerance for risk and objectives.  We also want to remind our clients of the strategy that we have used which includes the use of individual fixed income, structured CD’s and for many clients, annuities.  All these investments fit into a category we call “defined outcomes” and while they may show losses on a current basis, these products offer guarantees or specified maturity values, so will provide a measure of security to the overall portfolio. 

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