Good Planning Anticipates Market Volatility
The Market Reaction to the Coronavirus Emphasizes the Need for Financial Planning
The coronavirus has created humanitarian, economic, and emotional concerns. Today, let’s focus on the latter two items, placing emphasis on the impact to financial plans.
Financial plans are designed for the long term. The coronavirus almost assuredly is a short-term concern. The impact on the market could, however, impact how investors assess short-term funding needs. No one wants to sell stocks after a 12% decline.
Proper planning calls for maintaining a minimum of 6-to-12 months of liquidity for unexpected liquidity needs. A one week decline in the market is not an unexpected liquidity need, but it may alter the timing and manner one chooses to take distributions from their portfolio. Flexibility is the key and a good financial plan has already accounted for this.
From a portfolio perspective, the asset allocation decision is the major component of a long-term plan. Market declines in the magnitude of 10-to-20% are an not an uncommon occurrence no matter what the cause. A properly chosen allocation may not eliminate all discomfort of a market decline, but it should provide confidence that the client will be financially sound throughout retirement.
Finally, emotional reactions can create market opportunities. Investors tend to over-react to headlines. If one can put their emotions aside and buy while others are fearful, you may be able to enhance portfolio performance. At Filbrandt Wealth Management, our practice of rebalancing after large market moves forces us to use investor emotions to our advantage. In other words, a sharp market decline may result in stock purchases to get client asset allocations back in-line with long-term targets.
Processes like this provide comfort and financial well-being when the world becomes fearful.
Steven Hoffman, CFA