Financial Planning During a Pandemic: Three Key Actions to Consider Right Now
The last several weeks have introduced us all to more change than most of us could have imagined. In the midst of all this change and turmoil, clients, friends and colleagues are asking—what should I be doing? As the world around us changes, our natural inclination is change too. We want to be responsive and take action against a force that is largely beyond our control. More often, the right response, and the best advice we can give, is simply to be still.
While being still in a time like this can be unsettling and can perhaps seem impossible, consider the following three key actions today to set yourself up for success as the dust settles, as the pace of change slows and as we return to “normal.”
1. Don’t Let Short-Term Phenomena Impact Your Long-Term Planning.
Most investors are investing and saving for future goals, most commonly funding retirement that may last 30-40 years. Decisions about how much to save and which investments to purchase are driven by your risk tolerance and investment horizon. Risk tolerance refers to your capacity to absorb financially (and stomach) fluctuations in the value of your portfolio without making changes to your allocation. Your investment horizon refers to the length of time and extent to which you anticipate making withdrawals from the portfolio. While volatility in the stock market may be putting your risk tolerance to the test, your investment horizon probably has not changed based on current market conditions. If your long-term goals haven’t changed, neither should your long-term planning, even during volatile times like we are experiencing right now.
2. Reset Your Personal Balance Sheet.
Now is a great time to take a look at what you own (assets) and what you owe (debts). In accountants’ terms, these two primary items make up your personal balance sheet. Today’s environment may provide a great opportunity to hit the reset button, putting you in a better position to accomplish your long-term goals. More specifically:
- One of the strongest weapons to battle a volatile environment is an adequate cash reserve. A great target is to set aside three to six months’ worth of household expenses in a savings or money market account that is accessible and not invested. This amount of cash reserve can help investors absorb unforeseen expenses or decreases in income, without derailing their long-term investment objectives. Today, if your income has not been impacted by the pandemic, you may have more cash left over at the end of the month, simply because most of us are not going out and spending as much as we typically spend. The very thing that is dragging the economy right now could be providing an opportunity for you to boost your cash reserves.
- Today’s historically-low interest rates may also provide the opportunity to reset your debt. For example, refinancing your home mortgage could free up cash flow to help you accomplish other financial goals. You may also have the capability to reduce your mortgage term from 30 years to 15 years, allowing you to be debt free sooner and potentially allowing you to save thousands in interest payments over the life of your loan.
- The final step in resetting your personal balance sheet is to rebalance your investment allocation. As the stock market has experienced its first bear market in more than a decade, the percentage of stocks in your portfolio may have fallen in relation to bonds. This unintentional shift could cause you to realize lower market returns as stock prices recover. Now is likely a good time to realign your portfolio with your investment allocation target, causing you to buy depressed assets (stocks) and sell assets that have fared better (bonds), essentially buying low and selling high, and better positioning your portfolio to participate in a market recovery.
3. Take Advantage of Buying Opportunities in the Stock Market.
If you have remained disciplined as it relates to your long-term goals, and you have taken steps to reset your balance sheet, great investors are then set up to heed Warren Buffet’s advice, “Be greedy when others are fearful.” Predicting the bottom of a market decline is unlikely at best, but the wisdom of adding to your portfolio when the market has declined significantly could set you up well as the market recovers.
Being still when everything around you is changing so quickly and so drastically is not easy. Rather than making drastic moves to combat drastic change, be true to your long-term plan and consider these key actions that can set you up for long-term success.
If you have any questions related to your financial plan, contact your advisor or request a member of our team reach out to you. We hope you and your families stay safe and healthy.
Joseph McNair serves as a Member and as a Senior Client Consultant with Waverly Advisors. Click here to learn more about him or to reach out to him directly.