Broker Check
Financial Advice - What to DO and NOT DO right now

Financial Advice - What to DO and NOT DO right now

| March 13, 2020

Good afternoon -

This email is a bit long, but if you are a client of ours, please take a few minutes and give it a read. 

Many people have asked me how I’m doing these last few weeks.  We are VERY busy, but good, and I appreciate people recognizing what a mess the lives of my team and I become when the investment markets get so wild.  We are working extra hard to communicate with as many clients as possible during this time of increased volatility and concern. 

In short, it is a great time to consider buying equities/stocks and a terrible time to sell them.   If you don’t have any cash or investments to buy stock with right now, the best thing to do is nothing.  Sounds crazy, but 100% of the time in the past, that would have been good advice for diversified investors.  While certain elements of this situations are unique, we don’t think the end result will be any different.  For those that are retired and using their portfolios to provide income, scenarios like this is why we have an adequate amount of bonds or non-stock investments.  Those investments, in large part, have not declined in value these last few weeks.  While stock prices are down, needed or scheduled income distributions can and will be harvested from bonds, dividends and interest.  We try to manage these accounts so that our clients can weather a pro longed correction in the market without being forced to sell any stock or equities at low prices. 

We have placed more trades in the last ten days than any two week stretch in my 20 year career with 99% of them being buy orders for US stock.  I truly believe this mess has created the best opportunity to buy equities/stocks since 2008.  My recommended approach is simple; whatever amount of US stock you want to buy, buy one-third of that ASAP and then hold the other two-thirds back, to buy more with, if this market continues to decline before it eventually begins to recover.

Here are a few action items to consider to try and take advantage of this market decline.

  • It is an ideal time to make your annual contribution to your IRA or Roth IRA.  Investors don’t have much time left to do that for 2019 (April 15th deadline).  2020 Contributions can also be made.  The maximum contribution per person is $6,000.  Those age 50 or older can contribute $7,000.  You or your spouse must have “earned” income to be eligible to contribute.  Also, if you are a high-income earner and/or are covered by a retirement plan at work, your contribution or deductible (IRA) amount may be limited.  Our team can help you figure that out.
  • Converting an IRA to a Roth is something many people have entertained or have interest in.  The benefits of getting the IRA money to Roth are numerous and significant, but any amount converted is taxed as income for the year the conversion occurred.  With account value’s and prices being lower, it might make sense to convert shares while the price is down, and then, the eventual recovery in value is occurring tax free inside the Roth IRA.  If you aren’t familiar with IRA conversions, google it and educate yourself on how it works and the long-term benefits of the Roth IRA.  The recently passed SECURE act further underscores why, for many, it would be preferable to have money in a Roth IRA instead of a Traditional or Rollover IRA.  You can convert as much or as little as you want each year.  Conversions are not an all or none decision.  If a Kentucky resident, any amount converted up to $31,100 will not be subject to Kentucky income tax.
  • It is a great time to increase your investment amounts.  Logging into your 401(k) and increasing the percentage of your pay you invest each pay period is an easy way to buy more stock while prices are low.  Unfortunately, out of fear, many 401(k) participants will do the opposite and stop contributing.  Don’t make that mistake.

I've attached JP Morgan Slides that I think you may appreciate and can probably benefit from.  Take some time to study and understand them. 

  • The first slide (Annual returns and intra-year declines) is powerful.  Every single year the market drops from its high point (the percentage amount for each year is the red number below the red dot), but the gray bars represent each year’s return.  Nine down years out of the last 39 years is the take away.  On average, three out of every four years is a year where we enjoy market gains.  Intra-year declines are common, albeit the declines we are experiencing right now are more dramatic and quick than most.
  • The second slide (S&P 500 valuation measures) show how expensive or inexpensive stocks are based on the earnings.  The horizontal green dotted line in the middle shows that the 25 year average price to pay for $1 of corporate earnings is $16.33.  This data is as of March 6th.  The S&P 500 was down another 15% since March 6th as of 3:00 yesterday, March 12th.  Based on fourth quarter corporate earnings, we are now below that 25 year average price.
  • The third slide (Diversification and the average investor) makes me sad.  Highlighted in green at the bottom is the average annual returns for the stock market over a twenty year time horizon (not the best twenty years either).  The orange colored bar unfortunately is the average investors return over that same time.  My job is pretty simple, to help my clients make good decisions and avoid bad ones so that their returns reflect that of the markets instead of the average investor.
  • The fourth slide (Asset class returns) makes the case for staying diversified in good years and bad.  Diversification is the best way I know for investors to lower their over-all risk.

While I’m very confident that diversified investors will weather this storm, I’m equally confident that the number of people infected or diagnosed with this virus will dramatically increase.  The only people I “know” right now with the virus is that NBA basketball player, who stupidly touched all the microphones before he knew he was sick, Tom Hank’s, and Tom Hank’s wife.  Unfortunately, I think in a few short days, or more likely weeks, we will all personally know people who have it or may have the virus ourselves.  Certainly, almost everyone infected will be perfectly healthy within a few weeks.  It is a scary time, a sad time, and a time to take precautions with your own health.  We all need to take the medical risk elements of this situation seriously to protect against or delay its impact. 

We are here and ready to help you address your concerns and discuss opportunities.  Thank you for your continued confidence and trust you have placed in us.


Trevor N. Coe, CFP®