Blend Caution and Risk to Navigate Stock Market

NEW ORLEANS – The COVID-19 crisis has disrupted economies worldwide and wreaked havoc on the U.S. stock market. According to the New York Times, stocks have slumped about 35 percent since the coronavirus spread globally last month … and more than $8 trillion in value for shareholders has been erased.

So what does that mean for the Average Joe investor in New Orleans? We’ve been asking for advice from local experts. Here, Jason Bezou of Bezou Financial Planning Group, gives us his thoughts.

Do you have any advice other than leave your investments alone and trust the long-term results?

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Tms 9980jason Bezou 10.13.40 AmJason Bezou: Yes. In fact, good financial planners have planned for this for a decade and should not be overly concerned or make knee-jerk reactions. Stick with your plan. But that doesn’t mean to just hold your investments because the market will recover. We don’t know if or when things will perform well. We typically have some funds invested in fixed accounts like CDs, savings, fixed annuities and index annuities that have not gone down in value at all during this market dip, as well as things like government bonds that continue to pay interest and should eventually mature at their original investment. The amounts in each vehicle depend on each client’s situation, risk tolerance and potential need for emergency funds. That need will vary based on if they are working, own a business or their industry is more likely to have layoffs in hard times to name a few. Everyone is different. 

Many strategies exist. For example, for people using their investments for income, we had been taking money to cover their monthly expense from the best performing section of their accounts – such as selling stock mutual funds because they were up in value. When stocks drop in value for any sustained period, we shift the distributions so they come out of fixed accounts that did not drop. Sell high, right? So when stocks are down, cash is “high.” That gives more volatile investments time to recover.  

For long-term investors, when the market is up faster than expected, we often shift some of that high-performing money to cash or fixed-income accounts so that it is set aside for a future dip. Clients tend to want to put more in the high performers, and it’s our job to remind them that their boring cash or 3% rate on old fixed accounts gives them the guts to be in the market with some of their other money. Well that dip is here now, and funds are available for emergencies. They don’t have to sell low to cover a job loss that may have happened for the same reason that their stocks are down. In some cases, clients are using that money that was sitting on the sidelines to put it back into the market at a lower price. Even if we have not hit the bottom, we are down 30% from the highs. When the market gets back to its previous high, they will have taken advantage of the dip that has already occurred. Some clients have started to gradually shift cash into the market over the next six months.

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Other strategies will require conversations with tax preparers and financial planners. One example is to convert IRAs to Roth IRAs during dips if you’ve been thinking about that. You are taxed on the converted amount, which may be currently lower than it was before the drop if it had been invested in something that fluctuates with the market. Then it grows tax free in the Roth for future retirement, helping to meet future income needs without going into a higher tax bracket or causing Social Security to be taxed. Now may not be the time to take the initial tax hit from the conversion, but it’s worth considering. 

Some clients want to take advantage of the market recovery but are too scared of a further drop. There are vehicles available that give you the opportunity to take advantage of some of the potential future upside of the market while protecting either your income for life or even all of your principal if the market drops. For 10 years, some of these clients have been a little disappointed that they didn’t just go all in to the stock market in mutual funds or an aggressive managed portfolio because their friends made more than they did in the good years. But today they are sighing with relief that they have some protection. Typically, we will use a combination of these vehicles to protect income for a worst-case scenario, principal protection for a portion that they might need for large purchases in the future like the weddings and college tuitions I will have to pay for three daughters or whatever your specific dream is. It’s not just about building a diversified portfolio, unless your advisor just uses managed money or mutual funds. The options are almost unlimited, but complicated. In times like these it could make sense to ask your advisor to get creative. I can’t talk about any specific product or vehicle here because each vehicle fits a different need and each client should consider different amounts or percentages in each to plan for every market situation. 

We can’t predict, but we can plan.

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Do you recommend any strategies to buy while the value of many stocks is low?

JB: While the market was going up, you could have considered shifting a little from stocks to fixed accounts. Now that it’s down fast, you can gradually shift a little more of your conservative holdings to your more aggressive holdings. There’s no silver bullet, and I don’t give suggestions on individual stocks. If you are OK with stock picking and the chance of losing completely, then of course it’s a better time now than it was a month ago. If you liked a stock at $100 a share, you love it at $60. For the money you want to grow without being overly speculative, there are stock portfolios that your advisors can build in actively managed portfolios or well-known mutual funds. There are also fixed accounts with low rates but protected principal, or everything in between that you can imagine. Another strategy during big dips like this is something called “tax loss harvesting.” What that means is that you can sell some securities at losses, then buy something similar and take a tax loss for the year. You can’t buy the exact same thing right away, and you can talk to your advisor or CPA about the wash-sale rule. Even better, if you plan on holding that new investment for a long time and even until death, you can defer the taxation of it until you sell or potentially eliminate it for your heirs. Similarly, if you’ve thought of diversifying one or two stock holdings into a portfolio but didn’t because of a large capital gain, now might make sense when the capital gain has been reduced or even turned into a capital loss. The key is to have a plan in place based on your situation and adjust the holdings according to the plan that you laid out. And be prepared to adjust your plan based on life-changing events. If you don’t already have a plan, this dip should open your eyes to making a plan by talking with a professional who has access to or is a CFP. It’s not just about performance and having an advisor to pick stocks for you. It’s complicated, and I’m still learning every day and work closely with clients’ CPAs and attorneys as well as our own internal attorneys and thousands of internal partners. The goal is to make sure all of the professionals working for you are on the same team, understand the same plan and are moving you toward one goal.

How is this situation different from, say, the 2007/8 crisis, the drop after 9/11 or “Black Monday” in 1987?

JB: It’s very different. The bad news is that there is an unpredictable virus that just shut down almost every business worldwide. Despite some glimmers of hope such as antiviral medication testing, there’s otherwise a potentially long time of uncertainty. That makes us less worried about our finances and more worried about our mom and dad and neighbors. And adding to your plan to have a good will and maybe a trust in place to care for loved ones. The good news is there is much more liquidity in this situation. For a decade, banks have been carefully monitored, and it’s in their own interest to make better decisions. Investors are still cautious from the 2008 debacle and have more reserves on hand to cover slow times or layoffs despite recent spectacular economic conditions. The biggest difference to me is that we knew for certain that 2008 would be a slow and long recovery because of the permanent and unrecoverable losses that occurred. In this instance, recovery could be quick if the virus dies off in spring or some medication comes out quickly. Otherwise, it may linger, and we could be in for another long recovery. Markets can’t decide which they think will happen, so ups and downs are like never before. I think that businesses, governments, banks and individual investors are better prepared because of 2008. They are better informed because of easier access to information due to technology. And they are better able to adjust to this crisis. For example, most of my employees are able to work effectively from home, other than one person at each local branch. If the world can come together and we can all put aside political difference and blame games for a moment, we can tackle this together and hopefully bring the world together like it hasn’t been for a long time.

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