The financial markets continue to experience a great deal of volatility due to the yet unknown financial and economic impact of the COVID-19 pandemic. Additionally, Congress passed a $2 trillion stimulus package which includes a myriad of provisions aimed at mitigating the financial impact of the coronavirus. Our clients have asked important and timely questions about their asset allocations.
We think it is helpful to share how our advisory team frames our responses to these questions as we endeavor to provide guidance during these difficult times.
Windward, as a planning focused firm, works with our clients to build a plan based on their specific situation and selects an appropriate asset allocation. Accordingly, before making “wholesale changes” we work with each client to answer these questions:
- Has their individual situation changed?
- Is their asset allocation consistent with their plan?
- Has their risk tolerance changed?
The future is unpredictable and for us to opine on the direction of the financial markets would be a fool’s errand. Instead, we work with each client to assess their risk tolerance and invest their assets in a manner consistent with their specific plan and risk tolerance.
Finally, we recommend making changes to a client’s portfolio only when we have a full understanding of what has changed and believe in making incremental changes versus major one-time changes. Times like these require a disciplined approach to making changes given the day-to-day volatility in the market and the consequences of hasty action.
What changes are appropriate for my/our current asset allocation given the market volatility?
We monitor each client’s asset allocation and strategically rebalance when each client’s asset allocation is materially different than their investment policy statement. Therefore, if there are no changes to the plan, we are making the appropriate changes to each portfolio as needed to maintain the asset allocation previously set forth.
Do I/we get more aggressive with the decline in the equity markets? I have extra cash to invest for the long-term and want to get in with the market down?
With the decline in the equity markets, valuations are more attractive now than they were previously. Of course, we don’t know the future market direction, but in the spirit of making small changes, we might suggest that additional long-term funds are invested over a period of several months. For example, one-third of the additional funds over each of the next three months.
Do I/we go to cash and wait out the difficult times and get back into the market when things stabilize?
It is difficult to predict the impact of the recent crisis on the local, national, or global economies. Further, the financial markets attempt to look forward and are trying to price in the lower near-term challenges of the economy for the remainder of 2020 and 2021. Historically, missing out on the best days in the financial markets, in particular the equity markets, has reduced long-term investment returns. Therefore, it would be difficult for us to recommend an all-cash or significant reduction in equity exposure unless there have been material changes in a client’s situation that would require a change in their plan and their asset allocation.
We welcome your questions during these difficult times. As we’ve said before, “this too shall pass.”
This blog is provided by Windward Private Wealth Management Inc. (“Windward” or the “Firm”) for informational purposes only. Investing involves the risk of loss and investors should be prepared to bear potential losses. No portion of this blog is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax, or legal advice. Certain information contained in the individual blog posts will be derived from sources that Windward believes to be reliable; however, the Firm does not guarantee the accuracy or timeliness of such information and assumes no liability for any resulting damages.
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