Now that we have reached Summer 2021, when over 150 million Americans have been vaccinated, sports have full arenas, and schools and camps are back in session, we thought it would be a good time to reflect on the financial lessons one can learn from the pandemic. While we hope not to endure such an event again in our lifetimes, there are no guarantees. Moreover, there are a few salient lessons that can guide us in times of relative normalcy.
As you consider these lessons, it is worth taking a minute to remember the uncertainty, stress and (for many) panic that set in the Spring of 2020, when COVID deaths were skyrocketing in the U.S. and financial markets were collapsing.
Lesson #1: Be in Contact with Your Financial Quarterback.
This lesson can also be described in the negative: “do not go it alone.” Making important financial decisions in times of great uncertainty and even panic is extremely difficult – even more so if one does not have a professional advisor to partner with in the decision-making process. Many investors have a financial professional on their advisory team and those who did in 2020 are likely to have benefitted significantly.
First, the professional advisor should have provided a sounding board — someone to run ideas by and put a pause on some of the more emotional elements of investing and wealth planning that overwhelmed many investors in March and April of last year. Ideally, your selected advisor is also attentive, disciplined, data-driven, and guided by longer-term planning.
For many investors making decisions on their own, the Spring of 2020 was a time for selling assets and going to cash out of fear. This often turned out to be a double-whammy against them: (1) they incurred capital gains taxes on the sales, as, even during the March market lows, many securities were still up relative to their basis if they had been held for a year or more, and (2) many never felt right about “getting back in” and thus missed the snap back to new highs later in the year. Unfortunately, for those who recognize this as their story, it may take many years to make up for the losses and lost gains incurred in 2020.
On the other hand, we are beginning to see data that a significant number of investors who worked with a professional advisor (and certainly many who did not) did not panic in the Spring of 2020. In fact, they either held still and did not sell, or they actually bought into the downturn and came out with even larger gains in 2020.
Lesson #2: Use the Occasion to Step Back and Review Your Long-term Financial Plan.
In the first lesson, we discussed macroeconomics – what happened with the financial markets. Here, we look to microeconomics – your unique financial plan.
One of the most powerful ways to avoid poor short-term financial decisions during stressful times is to keep long-term planning goals top of mind. Most importantly, this should involve a review of a long-term financial/retirement model – including annual saving goals, assumed rates of return, and personal spending and retirement benchmarks.
By reviewing and understanding what goes into their financial plan, one can truly buy into a long-term time horizon. In doing so, they can look at short-term financial downturns with perspective and not let them create stress or lead to poor decisions, even in a chaotic and scary time, as the beginning of the pandemic surely was.
Lesson #3: Always Be Proactive About Taxes.
Because everyone wants to reduce taxes to the extent they can, it is not surprising that most taxpayers consider this lesson to be important at all times, and not just in times of crisis. Moreover, this lesson may be especially important in the next few years if proposed tax increases become law.
A detailed dive into all types of tax reduction tactics is beyond the scope of this article. However, one tactic that stood out in 2020 was timely capital gains and loss harvesting. Many advisors, including our team at OJM, helped clients benefit from the sharp market downturn in March 2020, and enjoy the run-up the rest of the year. This was achieved by selling pre-identified holdings into the market downturn, in order to realize significant tax losses and then reinvesting proceeds in pre-identified similar investments to fit the client’s overall allocation.
Prior to the pandemic, many investors, especially those who manage their own investments, may have thought that loss and gain harvesting should be executed in the fourth quarter, when one understands an overall tax picture for the year and which elements of the portfolio are up or down. This is a mistake. One of the lessons made clear in 2020 was that an investor who waited until the fourth quarter to harvest gains and losses would have missed a tremendous opportunity to enjoy large tax losses while investments increased significantly. The opportunity to enjoy this “win-win” came and went in March 2020.
Lesson #4: Find a Fiduciary Advisor if You Don’t Have One.
Many investors had more time on their hands in 2020 due to business slow-downs or closures, reduced travel and limited social activity. Some used that time to examine their investment portfolios, re-evaluate their existing advisor relationships, or even look for a new financial advisor. Through these endeavors, investors had a significant opportunity to understand the different ways financial advisors make money and to realize the value of a fiduciary financial advisor.
In short, there are two regulatory models for investment advisors – the fiduciary standard and the suitability standard. Fiduciary advisors must put their clients’ interests before their own, while an advisor operating under a suitability standard needs only to provide clients with suitable investment options. The fiduciary advisor owes a duty of loyalty to their client and the suitability advisor owes a duty of loyalty to their broker-dealer.
For many investors evaluating options for financial advice, the business model of the fiduciary makes the most sense. As many have returned to their busy pre-pandemic schedules, the importance of working with a fiduciary should remain top-of-mind when evaluating current or prospective advisors.
Along with health worries, many investors had substantial financial concerns during the COVID-19 crisis. From our viewpoint in 2021, we examined four time-tested financial lessons that gained new significance during the pandemic and will continue to impact our wealth planning in the future.