Wealth Management & Financial Planning

Wealth Management & Financial Planning

The Importance of Having A Plan When Market Volatility Strikes

Life is full of surprises. While sudden changes can be positive or negative, people seem to focus on the negative. Very few people ask questions when things seem to be working. But when an unexpected outcome occurs, expect the Monday Quarterbacks to break out of their huddle fast!

We have been asked if recent market volatility could be called a “black swan” event. Summarizing this metaphor, we recognize that just because we don’t see a black swan doesn’t mean such birds don’t exist. However, we don’t doubt the presence of white swans!  In the markets, a black swan refers to an incident clearly identifiable after its occurrence but totally missed prior to the event. Given that many professionals warned of a needed market rest, last week’s volatility was not a black swan.

The takeaway from last week is that investors should be alert to both opportunity and increased risk. Staying disciplined rarely feels good. It is easier to eat the chocolate cake than push it away. As January recorded many market peaks, it was challenging for our team to sell some holdings and pocket profits. But we respect a disciplined process.  That’s our job. If you are managing money with a broker or on your own, your job is to remain disciplined.

We often preach the “fiduciary focus” in this column and on our weekly radio show. Four things require constant attention: risk and volatility; fees and expenses; taxes both today and tomorrow; and real return. In each of these areas, you must be ready to act to improve your financial position.

When the market pulled back precipitously, you hopefully had a gauge to decide what investments needed to be held, trimmed or increased. Hopefully, an established plan made these actions easier to take without frustration or fear. But there’s more to consider.

Hopefully, you have built tax diversification into your plan. Diversification means you have money outside of IRA’s that are invested, optimally with some gains. When people transfer accounts to other advisors, accounts are often simply liquidated and reinvested. There are no tax issues with this approach assuming the IRE is a trustee to trustee transfer. However, there can be significant after-tax pain for money held in retail accounts upon simple liquidation.

We transfer those type of accounts in-kind, meaning they transfer as they are. Many times, we would prefer to sell stocks or mutual funds, but the taxes are just too great. Market pull backs allow us to act swiftly to trim weaker positions and buy other holdings on the cheap. Think of this strategy as making lemonade out of lemons!

Market volatility is always frustrating. People either worry the market is swinging too high or fret about how far it will fall.  Investors’ worries need to be replaced with a disciplined plan and a strategic approach to implementation. The market will deliver opportunities to improve your investment strategy, but you must be ready to act with a plan. Hope is never a good strategy.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.

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Due to health and safety concerns for our families, friends and our team, we have made the difficult decision to temporarily close our offices in Lafayette, Brownsburg, Indianapolis and Anderson until January 4, 2021. Our team will remain available to you by phone and email to continue to offer you assistance with your service requests. Please do not hesitate to contact us with any questions you may have.

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