Following the post-COVID stimulus hangover in 2022, the bull market has continued to run. One of the key factors was the Federal Reserve’s decision to
In a Market Downturn, Is Your Current Investment Plan Obsolete?
Published Date : July 14, 2020
July 14, 2020
In just the first half of 2020, investors have faced a multitude of concerns, paramount of which are the health and safety of loved ones and the resiliency of their investment portfolio. It goes without saying that any investor watching the markets decline should rightfully check in on the state of their investment performance and asset allocation. For many who rely on their portfolios for income, your asset allocation was determined by a thorough process of understanding risk tolerance and constructing a sustainable cash flow plan, with the ultimate goal of pinpointing the optimal risk/return balance to meet income needs over the long-term. Major market declines tend to trigger second guessing of investment exposures. It is not a bad thing to question your choices at this moment, but before any permanent changes are made, we recommend a closer examination of your full financial picture.
Revisit the plan from better days. – The first step you should take when contemplating any change is to dust off the most recent cash flow plan and walk through it with your Wealth Manager to discuss the risk, volatility and projected outcomes that were already embedded in the tested scenarios. Regardless of the date of your last cash flow plan, we still feel it provides important information. The real value of cash flow planning, often called Monte Carlo testing, is that the results are based on hundreds or thousands of scenarios that consider taxes, fees, inflation and most importantly, market volatility in the most extreme time periods like 2008. Simplified straight-line calculations, which can be easily coded into a spreadsheet, do not provide a robust set of realistic return scenarios. It is worth revisiting why the current allocation was selected and whether your plan allowed for any wiggle room to reduce risk and therefore potential growth while still covering your needs.
Evaluate your current options. – The options you have in the midst of a market downturn are: 1) exit market-sensitive investment holdings and repurchase them at a later date, 2) stick with the current investment plan or 3) increase purchases of risk assets while prices are depressed. For this exercise, let’s focus on 1 and 2. Intuitively, it might seem less risky to sell in a turbulent market environment, but that could ultimately prove to be the highest risk move. Depending on your previous cash flow plan’s results, selling at depressed prices could lock in a smaller portfolio size, putting more pressure on your portfolio to support your long-term cash flow needs.
Measure the risk of changing the plan. – If your original plan allowed for a reduction in stock exposure without threatening your long-term spending, then shifting to a more conservative portfolio for the duration of the investment time horizon should be explored. Your cash flow plan should be re-tested, with the assumption that your current smaller portfolio is the new starting point. It is important to understand that for some, the move to a conservative portfolio can only be temporary unless it is accompanied by a permanent reduction in spending. Furthermore, an interim move introduces timing risk, which is selling depressed assets and repurchasing appreciated assets, thereby locking in losses and missing out on a rebound.
What we have learned through various selloffs is that market recoveries happen in fits and starts. Often a recovery has long passed when the environment feels safe to invest again. There is nothing wrong with using a real sell-off experience to dial in the most optimal allocation of growth and preservation assets to meet your needs; however, at Sand Hill, we want to make sure your long-term success is not negatively impacted by short-term actions. The cash flow planning we do for our clients requires revisiting, especially in times of market stress, but it is always useful and rarely found to be obsolete. We have found that following these steps allows our clients to make the most informed and sustainable long-term decisions for their future.
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Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA.
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