It’s now been over a year since COVID-19 first hit American shores. While the pandemic has affected everyone to varying degrees, we can all agree that everyone’s life is different today than it was a year ago. It’s difficult to remember what normal looks like at this point.
If you are a mid-life professional who found yourself in between jobs during these past months, you can definitely relate to the idea of not recognizing normal.
Revisiting Your Financial Strategy in a Post-Covid World
In addition to adjusting to the new world Covid-19 imposed upon all of us, you may be thinking about other questions that would have seemed very unlikely in your pre-Coronavirus past. Should you return to the working world (if you have not already done so)? Or are you perhaps evaluating the question of retiring and/or pursuing a working retirement? As you consider these matters and what will make you happy in your next life chapter, you are also thinking about your finances and investments.
If you are like many successful professionals, your financial profile might have remained very strong despite experiencing job loss over the past year. I often see this among those who have been diligent savers over the years. Of course, the stock market’s amazing gains since last year’s low point in late March have helped sustain an important foundation for those who did not sell their investments during that difficult period.
It may be an appropriate time to re-evaluate your situation, especially if you remain in transition professionally. In fact, some have recently asked me whether they should materially reduce their equity allocations, in response to the 75%+ gains in the Standard & Poors 500 Index (“S&P 500”) from the panic selling that ensued after last year’s economic shutdown.
There are many considerations to make before such a portfolio adjustment and I want to discuss those in this article. One factor is one’s outlook about the economy and equity markets. From an economic standpoint, it does not appear to be an obvious time to reduce one’s exposure to stocks.
Economic Prospects Begin to Brighten
Since the approval of Johnson & Johnson’s vaccine last month, we have three vaccines available in the United States—and some semblance of normal is fast approaching. COVID-19 cases and hospitalizations have dropped significantly in recent months. More businesses have reopened. Kids are going back to school. More diners are headed to restaurants. Air travel has picked up.
The US economy—though not back to normal yet—is poised to potentially recover all of its lost output from last year’s recession during the first half of this year. Shoppers are doing their part as retail sales jumped 5.3% in January—the strongest month-over-month increase in seven months. February’s economic reports were a little disappointing, although this was apparently due to the record cold temperatures that temporarily restricted parts of the economy across much of the country.
Consumers’ coffers were replenished by the federal government’s roughly $900 billion stimulus package passed in December 2020. US household savings are now $1.4 trillion above last year’s levels, according to the Bureau of Economic Analysis, which should provide fuel for more pent-up spending after restrictions are lifted.
The bridge policymakers began to build a year ago to the end of the pandemic is getting even stronger. President Biden signed another fiscal stimulus package in March, worth over $1.9 trillion and including more direct aid to consumers and supplemental unemployment insurance.
Meanwhile, the Federal Reserve continues to provide unwavering support for the economy. Our economy’s resilience, coupled with this significant fiscal and monetary support, has enabled stocks to do even better than normal—and early in bull markets, normal is pretty good.
Some fear the economy has too much support. A healing labor market with about 10 million fewer jobs than a year ago suggests that more help is needed. But, as the economy fully opens, we will have to watch inflation closely for signs of overheating. I wrote about these concerns just a few short weeks ago. The Federal Reserve may have to pump the brakes sooner than anticipated.
Should You Change Your Investment Allocation?
There is almost always uncertainty when it comes to the equity markets, even when the near-term economic prospects appear solid as they do now. As a result, I think you should frame decisions about your investment allocation around an objective assessment of your personal financial situation, your risk tolerance, and the degree of portfolio fluctuations that would be appropriate for any withdrawals you might be taking or may need to take in the future.
These factors might be more useful to consider than making portfolio changes based on an opinion about how the stock market may perform over the next year. I do think there are many reasons to think that equity returns have the potential to be favorable for the year ahead; however, the actual future stock market returns are truly unknowable.
Attempting to make portfolio adjustments, especially significant changes, based on a prognostication has the potential to compromise your long-term finances and not be helpful at all. This does not mean that I am a typical financial advisor who simply repeats the mantra of “stocks for the long-term!”
Although I do think there is truth to this idea (true confession!), I also recognize that equities are on a historical basis the most volatile asset class. We have all heard stories of retirements impaired or compromised because of an unexpected market decline. In fact, I urge people to respect the unknowns of equity investing, irrespective of how positive the economy or market condition may appear.
Equity Investments May Be a “Double-Edged” Sword
As we enter mid-life and especially a time of change, owning fewer equity investments as a percentage of your entire savings may often make sense too. As a result, a time of transition represents a great opportunity to develop a financial and investment plan that reflects a future that might be quite different from your past. That future could include changing your investment strategy and long-term investment allocation.
As I have suggested in past articles, financial planning provides an excellent context for approaching these investment decisions. I advocate a methodology called “cash flow financial planning” which creates a detailed and rigorous projection of your finances to understand your potential portfolio withdrawals over both the near and long term.
This modern approach to financial planning, combined with an understanding of your attitudes toward market volatility, provides an excellent framework for reviewing, and where appropriate, changing your equity allocation. And legitimately, that approach might include making a strategic decision to reduce your equity investments, even while you may recognize their long-term growth potential. Such a reduction might even be significant depending on your circumstances.
However, the primary drivers of such a change would be a long-term outlook about your goals and objectives, not necessarily a short-term prediction about whether the near-term future may be a favorable period to own stocks or even worse, an attempt to “time” the market.
Resist the Temptation to Become a Market Sooth Sayer!
One misconception I have noticed is that investors sometimes implicitly assume that investment success depends on trying to predict the trajectory of the stock market. In my opinion, there could be nothing further from the truth. The path which may offer the greatest likelihood of success is one rooted in a disciplined, long-term allocation strategy based on your goals and objectives.
Staying the course with an investment allocation may often offer the best opportunity to successfully moving toward your long-term investment goals, rather than trying to outguess the market. This may be especially true if you have made a strategic decision to reduce your equity investments, as you move toward a new life stage.
However, this does not mean that all of us need to be “buy and hold investors” or that we have to simply “hope for the best”. As some of you know, I think it does make sense to occasionally make “tactical” portfolio shifts that reflect near term outlook of the markets and risks. These changes could result in a greater or reduced allocation to equities or fixed income instruments, and/or changes to the types of stocks or bonds held in the portfolio.
The changes would usually be far more modest and should not go too far astray from your long-term allocation strategy. For example, I do not think you have to consider dramatic changes like a complete liquidation of your equity investments. These could be poorly timed and may jeopardize the ability of your equity investments to perform their role over the long-term.
How Will Your Normal Look?
Normal is approaching—or at least the post-pandemic version of normal—and it’s looking pretty good, even for those who remain in transition. This may provide you with an opportunity to re-imagine your future in our slowly emerging post Covid-19 world. It may also provide a great chance to align your financial plan and investment strategy to our ever-changing world and how you want to live in it!
As always, please contact me if you have any questions or comments.
Important Information
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
All index data from FactSet.
