Financial Planning and Market Update

Dear Clients and Friends,

For this Update I am sharing a document prepared by Daken Vandenburg, the Chief Investment Officer of the Mass Mutual Trust Company, one of our trusted investment partners. In it Daken sets the market turmoil we are living through in a historical context that I find extremely useful. While what we are experiencing has been said to be sui generis, one of a kind, different from all other bear markets (there has been one about every 6 years throughout the history of the stock market, and people usually say the same sui generis thing each time!) I take some comfort in the conclusion (illustrated by Chart #2 in the attached) that in every case throughout history, years one, three, and five following the bottom of a bear market, the returns have been positive, and generally by a lot. These gains have been achieved in different ways that take into account who the winners and losers of the turmoil have been and the ways in which each downturn creates or is the harbinger of some changes in the way we think about and do business. It’s also the case that each recovery proceeds at its own pace each time (it took the 80% drop in 1929 until the end of WWII to fully recover, some see full recovery in months), but the results suggest that our markets are able to find their way to a new equilibrium and recovery, in spite of prognostications to the contrary. Our system has its deep and abiding flaws – many of which are in the spotlight at times like this — but it’s hard to argue that it does not have an internal logic that so far at least has helped avoid the apocalypse, even in 1929. The 2007 meltdown had many thinking that it was signaling the end of capitalism. I’m sure you can think of other events (the Spanish Flu, the tech bubble, 9/11) that led to similar conclusions, but to me it’s clear that the “system” grinds on and readjusts and has so much power and so many self-protective and self-generating mechanisms at its disposal that it’s here to stay, until the revolution (and I don’t mean Bernie’s!).

I also want to share a financial planning perspective. We’ve spoken in depth with many of our clients now, and while I’m happy to report that the number of those who have insisted on selling off all or a large portion of the stock portion of their portfolio at a significant, permanent loss remains very low, it’s clear that many have the general perception that the losses in their portfolio are all but permanent, and that a drop in today’s market value of their investments has permanently altered their investment landscape and therefore their prospects for a comfortable life. For many it’s only a feeling, but it’s one that gets expressed potently in many ways. For example, our planning clients will suggest that because the value today of their equities is depressed, we need to re-jigger their plan and lower expectations of income or asset appreciation, and therefore lower expenses. The antidote to this emotional leap into the abyss is that the anticipated investment return rate that the plan is based on the assumption that the market will go up and down, that there will be bears, both teddy and grisly, and that there will be bulls, with or without horns. So that when we project an ongoing rate of return of 6%, for example, we are ALREADY assuming that in some years there will be returns that far exceed that (look at the last one), and years that disappoint (maybe this year), and sometimes disappoint badly. We also assume that expenses remain relatively stable and consistent with the projections in the plan. But when it all gets averaged out over the LONG TERM, it is reasonable to expect that 6%, or whatever the asset allocation predicts, is a reasonable expectation. So no, we don’t have to re-do the plan – that is, unless the client, working with us, reassesses the level of risk he or she is comfortable with, or the time horizon has been altered and changes the asset allocation accordingly going forward once the smoke has cleared. The planner’s job is to help stay focused on the plan and corresponding asset allocation, taking into account the fact that portfolios are already being automatically reallocated by the volatility on a daily basis – a 60/40 portfolio after stocks have lost 25% of their value is no longer 60/40 but is closer to 50/50.

One note on RMDs (Required Minimum Distributions) – this is one area where it might have been possible to be forced to draw from the stock portion of your portfolio, thereby locking in losses. Well it looks like you won’t be forced to do that – there is an RMD “holiday” this year per section 2203 of the newly enacted CARES Act that, in certain cases, will allow you to forego taking that distribution. And if you need the income, which is likely for those in retirement, you have the option to work with your planner to be sure that it doesn’t come from selling equities (which should allow those equities to regain lost value if and when the market rises). And for supplemental income it is usually best for tax purposes to use non-retirement accounts and cash to supplement your income anyway.

Right now the main thing is staying safe, keeping others safe, and remaining as calm as possible. All of us here at DFG are doing what we can to monitor your investments and plans and be on the lookout for risks and opportunities created by the turmoil – there will be more on that important topic in our next Update. In terms of Covid-19, there is a whole body of literature about how times of the “plague” and similar human disasters open pathways for survivors to gain insights, grow in unexpected ways, and discover new opportunities, and it will probably apply to this year of dread we are now living through. I am reading Year of Wonders: A Novel of the Plague, Geraldine Brooks’ first novel. I’m regarding it as homeopathic – looking to inoculate myself against horrors what could await us, and learn something about survival, perseverance, and resilience. (I would love to discuss it with anyone interested – drop me a note!) Along these lines there’s a recent editorial by David Grossman in “Ha’aretz” brought to our attention by a client that is in my opinion is required reading. In case you have some time on your hands and don’t simply want to hide and watch or read romantic comedies and reruns of “mixed martial arts repeats” (see Gail Collins’ fairly recent editorial in the NYT), don’t forget Camus, and many other writers from Boccaccio and Defoe to Atwood, Crichton and King – extreme conditions put the human condition on full display, and writers love it. And there is so much music that speaks to us now in new ways. I like Abbey Lincoln’s “Spring Will be a Little Late This Year” and Tierney Sutton’s “You Must Believe in Spring” – you can find these on most online music services.

Meanwhile, enjoy reading the attached economic analysis by Daken Vandenburg, and stay in touch. Once more, my closing salutation — Vash ayere hent un blaybt gezunt — wash your hands and stay well!

Allen Davis, for the Davis Financial Group Team

Allen J. Davis, CFP® ChFC
Financial Planner and Advisor
Davis Financial Group, LLC
10 Bay Road, Hadley, MA 01035
(413) 584-3098 x11 office
(413) 427-2782 cell
(413) 584-0160 fax
www.davisfinancialgrp.com
ajdavis@davisfinancialgrp.com

Due to the escalating COVID-19 situation, we have suspended in-person meetings and visits to our office to protect our clients, employees and the greater community, and to do all we can to flatten the curve. That said, we remain fully staffed and capable to conduct all business remotely via phone, email, web conferencing and paperless technology and serve existing and prospective clients alike. So please don’t hesitate to call or email us if there’s anything we can do to help you.

We wish you good health and look forward to hearing from you soon.

Our Contact Information:

Allen Davis
Cell (413) 427-2782 email ajdavis@davisfinancialgrp.com
Lou Davis
Cell (413) 374-3565 email ldavis@davisfinancialgrp.com
Joanna Ballantine
Cell (413) 531-4029 email jballantine@davisfinancialgrp.com
Carol Valade
email cvalade@davisfinancialgrp.com
Ellen Carey
email ecarey@davisfinancialgrp.com

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