The Changing Face of Planning?

It’s been a little more than three months since the stock market craziness began and just over two months since the lockdown started. So much has happened since then it seems like a year already. I recently heard someone with an impending birthday joke that they’re skipping this year because they didn’t use it. I don’t know about you, but although I’m optimistic about the rest of this year part of me agrees with that sentiment.

These have been some of my most challenging months in business. Challenging not just in the sense of day-to-day work, but also mentally. As I’m sure has been the case for you, the last few months have been stressful and worrisome for me. So much uncertainty and so many mundane aspects of life upended. Following virus news has been a task all by itself, not to mention all the market and economic updates. But while much of this has been negative, enough has been positive that I’m hopeful about the future.

There are signs, although some are only barley flickering, that we’ve passed through the worst of the market impact of the virus and maybe also “the bottom” for our economy. If history is any guide there’s a strong possibility for a second shock to stocks in the coming months, but hopefully not nearly as bad as we saw in late-February and March.

The economy may also be starting its long slog out of the hole we’re in. Some have referred to their expectations for a “V-shaped” recovery, but it’s likely to look more like what others have termed a “Nike Swoosh” recovery. If you think about it a moment that makes intuitive sense: a deep drop followed by a long and hopefully steady ascent toward normalcy. I don’t know anyone reasonable who expects this process to be quick. And that’s just the financial aspects of recovery.

As markets and eventually the broader economy recover the social impacts of the pandemic will take longer to play out. We’ve been told to expect a “new normal”, but what will that look like? Will everyday life experience a V-shaped recovery, or will something like social distancing linger long after the effects of coronavirus wear off?

From my own little corner of the world I’m wondering how concepts like this will ultimately impact the nature and business of financial planning. Surely, planning has never been more important, even in the face of extreme uncertainty. Recent events may have forced your plans to change, or your perspective may have shifted during this crisis. One of the many things our current predicament has revealed to me is that the way we work together needs to be more flexible.

I’ve never been one to drag clients into my office so they can hear about things that are important to me but less so to them. This is why I don’t make clients come in every quarter, or even every year, if there isn’t a specific reason to do so. So much these days can be accomplished through phone, email, and now video conversations, that coming into the office seems less essential.

Though nothing beats in-person communication, the way we accomplish it is changing. If you had not heard of video conferencing before, you now know all about it. Tens of millions of Americans have been getting a crash course in the technology during this crisis. Face-to-face communication through the medium of your smartphone or computer monitor is now so popular and convenient that its likely to stick around. The trend had been growing steadily in recent years but, as with so much else these days, coronavirus has accelerated adoption.

Case in point, I’ve sparingly used screensharing and video with clients for a while but have been generally slow to adopt the technology. I’ve now used it more in the last few months than in the last five years combined. It’s just too convenient and helpful. We get to meet from wherever you are, with no concerns about traffic or parking. We can see each other’s screens to share information and, as the mood strikes you, can even see each other.

As it turns out this morning marks the second conference I’m attending virtually this month. In recent years I would have spent today and tomorrow in San Francisco and the other conference would have been in Denver. Both are now in the comfort of my office, my house, even I my car. While I have no intention of going entirely virtual with clients and hope to get to physically go to a conference again soon, video is a powerful and convenient way for us to communicate that should make your life easier.

I love financial planning and working with you to ensure your long-term success. The difficult times in my career have only served to confirm this, and the current crisis is no exception. As we move forward out of this pandemic together, I want to ensure that I’m being flexible enough to meet your changing needs. Leveraging video is a natural outcome of this.

Additionally, here’s a mildly optimistic article from The Wall Street Journal. As stated at the end, our ultimate path forward is dependent on the path of the virus, but it’s good to see economic activity perking up a bit.

Have questions? Ask me. I can help.

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What to Sell for Cash

This week let’s look at a question I’ve received from a number of clients recently. The question has several variations but revolves around a central theme: What do we sell to generate cash when stocks are down?

This question isn’t about trying to time markets or reacting to media-driven uncertainty and fear. Instead, it’s a practical one where folks are trying to fund their living expenses in retirement, or perhaps they have larger expenses coming up and will soon be in need of cash.

As we all know, stocks plunged mid-February through April, but an upsurge has followed. Some stocks have recovered half (or more) of their losses, so thinking about selling and taking a breather from risk can seem obvious. But while this might make good intuitive sense it’s probably a bad idea for the long term.

We never want to be forced to do anything and it’s no different when it comes to investing. I’d much rather have options and asset allocation (your preferred mix of stocks, bonds, and cash) provides some good ones at times like these. While the stocks in your portfolio have been taking a hit lately, your bonds have likely been performing well, even for the last year or more. This provides a good opportunity to do something counterintuitive: not selling stocks when they’re down – selling bonds instead.

The typical core bond fund is up around 4% this year and perhaps 10% over the past 12 months. There are several reasons for this, but the bottom line is that if you’re looking for cash to spend from your portfolio, bonds are probably best to sell first. Longer-term bonds have been up the most, followed by medium-term and then short-term. You can pick from these funds in that order to help meet your spending needs. An exception to this would be high-yield, or “junk bonds”. This category tends to behave like stocks during volatile times and have done poorly lately. These would be the last bonds to sell.

If you’re retired, hopefully you have at least a few years’ worth of spending needs stored in bonds. But assuming you end up spending all your bond money, then you might be forced to sell stocks before a full recovery. If you’re finding yourself in this situation now, as with deciding which bonds to sell, there’s a priority to consider.

Small-cap stocks have performed the worst in recent months, followed by mid-caps. This is mostly due to these smaller publicly traded companies being local (domestic, not large multinationals) and investors assuming these businesses would be hit hardest by national lockdown orders, cratering consumer demand, and so forth. Large-cap stocks (the multinationals) have fared the best lately, with the Large Cap Growth category being the best performer by far.

So, which category of stocks do you think you’d pull cash from first? You might look at small-caps and want to unload those because they’ve done poorly, but it’s likely better to sell large-cap funds first, especially the growth-oriented funds. This latter category has many of the big healthcare and tech names that have been able to weather this storm best. They’re the cleanest dirty shirt, so to speak, in your stock portfolio and would be the best to sell first should there be a need.

If you’re selling bonds and stocks in your retirement account, you don’t need to worry about capital gains taxes. But if you’re selling in your non-retirement, or brokerage account, then capital gains taxes are a consideration. Assuming you “harvested” losses during the past couple months, you can use those losses to offset any gains from selling bonds. If you haven’t yet harvested, maybe now is a good time.

Additionally, you may notice that aggressively selling bonds and then picking off your stock funds also upsets your asset allocation. If you started out with 60% of your portfolio in stocks and the rest in bonds and cash, you could find yourself getting ever closer to having 100% of what’s left invested in stocks. While that’s not something you’d necessarily sign up for initially, it’s sometimes what you need to do if you’re living off your money and stocks are down for a prolonged period (which is certainly possible moving forward from here).

The idea with this more practical take on asset allocation would be to let yourself get off track with your preferred allocation but then rebalance back to normal when markets have stabilized. Since we’d hopefully only be pulling money from your bonds, we’d be able to leave your stocks alone and let them fully recover, even if it takes multiple years. This is absolutely preferable to feeling forced to sell stocks when they’re down. Doing do, as we all know, locks in your losses and makes it much more difficult to recover from a market downturn.

Have questions? Ask me. I can help.

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Oil Floats

Something interesting about the coronavirus outbreak has been the number of “firsts” popping up. We’ve seen firsts for unemployment claim levels and for speedy stock market declines as well. We’re even in the midst of what feels like a first-time national run on toilet paper (at least since the 70’s – something about a Johnny Carson joke gone too far…). Another first in the past week has been negative prices in crude oil markets.

Last week the price of the U.S. oil benchmark, West Texas Intermediate, fell so far so fast that the price went negative, a first in modern history. As news broke of panicked selling, those of us not directly involved in the business got a reminder of how fundamental and powerful the forces of supply and demand are, the complexities of oil pricing, and how storage plays an important role.

Companies that use oil often buy it months in advance based on assumptions about business needs. During normal times, storage ebbs and flows based on supply and demand and usually finds an equilibrium. But these are far from normal times. As demand dried up because of stay-at-home orders here and around much of the world, excess oil already bought and paid for started accumulating rapidly. And as we’re all painfully aware, during this fast-moving crisis Murphy’s Law (if it can go wrong it will go wrong) applies to oil markets just like everything else.

The economic problems caused by coronavirus have left many purchasers of oil in a difficult spot. They know this situation won’t last forever and they also know they can’t simply dump the excess oil they’ve bought, like dairy farmers or pork producers are doing with their own products. Instead, they have to store it or, in some cases like last week, pay others to buy it from them, creating negative prices.

For those trying to store excess oil, the small town of Cushing, Oklahoma, is a primary location. The town of about 8,000 people is known as the “pipeline crossroads of the world” and its “tank farms” can hold approximately 91 million barrels of oil. Normally about 30% full, these are expected to reach capacity in the coming weeks.

With Cushing rapidly filling up, super tankers are floating around holding an estimated 160 million barrels of oil, about two to three times normal according to The Wall Street Journal. Companies typically rent these very large crude carriers (VLCC) for shipping and are currently paying a hefty premium to use them for storage. The ships are stationed outside major ports from Singapore to Long Beach and, presumably, will float there until demand bubbles up and prices for oil rise. The Journal also reports that each VLCC can hold about 2 million barrels and that there are enough out there to hold twice the current level. That’s a lot of oil stored very expensively. Hopefully we won’t have to find out where to store oil after that!

Meanwhile, oil prices are no longer negative, but volatility remains high. Just yesterday prices were moving downward around 25% to $13 even as the broader stock market moved higher. The price of oil is important for many reasons, just one being industry profitability. My understanding is that companies along the supply chain need oil prices to be around $30+ just to breakeven. Clearly, the oil situation is far from stabilized as people on all sides of the business are just as uncertain about the future as everyone else.

Here are two links to more information about this topic. The first is from JPMorgan and the second is a longer piece from The Wall Street Journal. The latter has a soft paywall, but hopefully you can access it because it’s an interesting read.

Have questions? Ask me. I can help.

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Tapering Into Retirement

There’s a slow but growing trend of workers thinking about a phased approach to retirement. The idea is that instead of working full tilt to some predetermined age and then quitting cold turkey, you start backing off from the 40+ hour work week earlier. Maybe you cut your week down by a day for a few years, followed by another and another until you’re eventually fully retired. You’d get more time with family, friends and your favorite activities, but also more years of income. I refer to this as tapering into retirement, but you can call it whatever you like.

While this might not meet the standard definition of retirement, and certainly not the “corporate” definition, it’s what would probably work best for most people. Many folks haven’t saved enough to retire early but don’t necessarily want to work full-time forever either. Part-time jobs during retirement can help with this, but people aren’t looking for just any job. Many simply would like to keep doing what they’re currently doing, only for less time and with less stress. Having three-day and then four-day weekends on a regular schedule would be nice, right? Maybe it helps strike a balance between wanting to slow down a bit while also remaining relevant and engaged in the workforce.

Tapering would also probably work best for most companies, even though it cuts against the grain. Employers large and small would get to keep their intellectual capital around longer while also making room for the next generation. Employers could (and probably should) keep these tapering employees on their benefit plans. The cost would likely be covered by the pay differential between those tapering and the younger staff members taking their place.

The tapering concept also makes sense from a technical planning perspective. While there would be less income during the beginning of the tapering process, the worker would probably continue working longer by avoiding burnout. This leads to more income for the household over time, fewer draws from retirement savings, delaying taking Social Security, and so forth, all of which helps shore up one’s retirement plan.

Perhaps the massive reconsideration of work and the workplace going on right now will cause Corporate America to wake up to new thinking about transitioning employees into retirement. Only time will tell, but at least one concept seems clear: the slow shift to virtual work has accelerated dramatically. This might help pave the way for would-be taperers.

Along the lines of tapering into retirement, check out the following article, “Losing the Retirement Assumption”, by Mitch Anthony, a thought leader in the financial planning industry.

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Filtering Out the Noise

There is a ton of information flying around out there. Understandably, it all seems to be tied one way or another to the social and economic predicament we’re all in. This makes sense given how uncertain things are right now. The information that gets under my skin a bit, however, comes from those seeking to profit from the uncertainty and fear that permeates the minds of many investors. They get folks riled up and then offer a pre-packaged solution… an age-old trick that does more harm than good.

An example comes from writers of investment letters that seem to perpetually peddle doom and gloom. They write about the fall of the global financial system, how the stock market will eventually crash, or how the dollar will no longer be the world’s currency of choice. They write this so often, and for so long, that eventually some aspects of their predictions are bound to come true, even if by pure coincidence. Some even go so far as to claim they saw the current pandemic and economic impacts coming. They point to years of negative commentary and predictions to say, see, I told you so! What they don’t tell you, or at least not clearly, is that their commentary and recommendations often line their own pockets, either through sales of proprietary products or referral fees.

My problem with this kind of thing is that the information may have entertainment value, but it’s not very helpful for guiding investors through a crisis. Instead, I’ve found perseverance easier to muster when we rely on thoughtful evidence-based analysis and strategies that have been proven over long periods of time. This route is less sexy and can be harder to “sell” but is probably going to work out better than latching onto whatever the latest investment fad is.

Along these lines, the following is a thoughtful piece providing perspective on the current situation and the prevalence of doom and gloom soothsayers. It’s geared toward financial advisors, but I think the content and messaging is appropriate for all investors. The author does call out an investment letter writer by name. I don’t think it’s necessary to the overall tone of the article, so I’ve removed reference to it. A link to the full article is available at the end should you want more information.

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It Keeps Getting Weirder

Infection rates, death counts, and this or that business deciding not to reopen. Understanding when to wear face coverings. Stay-at-home orders that seem perpetual and a mark of the new normal. These and myriad other uncertainties make it extremely difficult to keep a clear head amid a turbid flow of information coming from all points of the compass. The problem, of course, is that we’re in a historically unprecedented situation. We have little to reference for appropriate context and guidance about what to expect.

For example, the price of oil had been cratering in recent weeks on demand uncertainty. This makes sense given that so many people are staying home, not driving or flying, and so forth. Yesterday when the contract for delivery of oil in May was set to close many who owned it feared (presumably) not having enough storage space for the planned excess and had to pay others to take it off their hands. This caused the price of oil to close negative for the first time in modern history, probably one of the strangest occurrences I’ve seen in the markets. Now, this doesn’t mean gasoline will soon be free. Oil contracts for future delivery, even later this summer, are not negative, but right now there’s too much Texas tea floating around and (again, presumably) not enough places to store it. 

There truly seems to be no shortage of negative headlines in the world these days. But while there is much to be fretful about and even fearful of, hope remains. If optimism is a choice during the best of times, it’s a cultural imperative during times of crisis.

Along these lines I wanted to share recent work from my research partners at Bespoke Investment Group. I look forward to reading their analyses because they are apolitical level-headed observers of the economy, market developments and, during tumultuous times, the news in general. In short, they help provide meaningful context that is so hard to come by these days.

The following two short pieces are a good summary of where we’ve been and where we might be headed, as per Bespoke. Click the link below to see the information on my website.

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