One of the first signs many of us had that the COVID-19 crisis was serious wasn’t Americans falling ill or local businesses closing. It was the day we woke up and saw our 401(k)s and other investment accounts plummet by as much as 30 percent.
We now know that a likely global recession is on the horizon and, while many Westchesterites are coping with telecommuting, furloughs, and outright unemployment, all that can seem a bit more dire when what little we’ve squirrelled away for the future is potentially in jeopardy.
The SKG Team at Barnum Financial Group recognized this almost immediately, beginning a series of informative, free 20-minute webinars to help their clients and community understand and create strategies to cope with the suddenly volatile market.
We sat down with Elmsford-based certified financial planners and team leads Ben Soccodato and Chris Kampitsis to find out the most important information they can provide local investors, including an exclusive free webinar just for Westchester Magazine readers.
Westchester Magazine: First and foremost, after a major market downturn, what are some panic reactions investors are prone to?
It is not uncommon for investors to panic after a major global crisis and a subsequent market downturn. We often see investors redeeming risk assets such as equities, moving to cash or other conservative instruments, and in general, locking in losses that they may have experienced in the market in an effort to, in their minds, preserve as much of their principal as possible.
Are there short-term adjustments investors can make to rebalance their portfolios more conservatively in a bear market during times of crisis?
In the short-term, after an immediate and sudden loss, very often one of the miscalculations investors make is deciding to rebalance their portfolio more conservatively. This can prevent them from enjoying more of the rebound and unfortunately locks in those short-term losses. Two of the things that we emphasize at all times, bull markets and bear, financially fruitful and financially difficult, is that all investors maintain:
First — an appropriately sized emergency fund for their personal finances, so they can avoid having to dip into their investments in a pinch.
Second — what we call a “volatility buffer,” which means an allocation of conservative investments inside their portfolios. If they do need to take withdrawals in the down market, they are able to take from those more conservative investments and allow their risk-on investments (such as equities) time to recuperate, so they don’t have to sell those at a depreciated price.
Many investment accounts, 401(k)s and IRAs included, have lost up to 30% of their value. Is re-balancing to more heavily favor bonds over stocks a reasonable action to take for now, or is that more of an over correction?
In most cases that would be an overreaction. A lot of it comes down to time horizon. If your time horizon is such that you are not planning on touching these assets for say five, six years, or more, the worst thing that you can do at the bottom or in the midst of a down market is to over-correct conservatively.
When fear, anxiety and panic is at its highest, it is often a sign that we are closer to a moment of genuine financial opportunity. If we look at every crisis over the last 80 years, from Pearl Harbor to the Great Recession, that data shows that the market returns 3 and 5 years out from those giant market drops are overwhelmingly positive.
What’s one piece of advice or cautionary admonishment you’d give Westchester investors worried about their holdings during this time?
I think the single biggest piece of advice we’d give to investors would be to develop and maintain a three-bucket approach to investing through good market times and bad:
Funds that you may need to touch in an emergency or in the next one-to-three years should be conservatively invested at all times.
Funds that you are not going to touch for six-plus years should be more aggressively allocated within your risk tolerance and investors should resist the temptation to tinker with that when the market is going through a downturn.
The bucket in the middle is where investors should aim to “beat the bank” but not necessarily beat the stock market, aiming for a more consistent single-digit rate of return that would be an appropriate place to adjust slightly in current market conditions. Ideally this bucket should drop less in the event of a downturn and be more focused on income and yield than the growth-minded long-term bucket.
If you have a plan, stick to it, that is what is there for. If you don’t have a plan – now is a great time to put a financial plan in place.
To help Westchester Magazine readers with their investments at this time, The SKG Team at Barnum Financial has scheduled a brand-new webinar session on Monday, April 13 at noon. Registration is free and can be done online.