March 13, 2020
The other day, a client called to ask about Coronavirus. The markets were in turmoil (they’ve since dropped further) and the government had just lowered interest rates by 0.5 percentage points. But he wasn’t calling so I could ease his concerns about the huge daily market swings, the Toronto Stock Exchange or the trading platform Robinhood being briefly shut down. Instead, he wanted to know ‘How do we take advantage of this?’ He saw opportunity.
This wasn’t by mistake. It’s part of my planning process.
Investments and markets, in the short term, can be extremely volatile. It’s why I run risk assessments for each client and account I open. It’s no secret. We plan for it by “shocking your assumptions.” In practice, shocking your assumptions means creating worst case scenarios to see how your plan reacts. It’s like a crash test for your portfolio.We want to see in extreme situations, what you can expect. Will your money last? Do you have tactics available to ensure you remain afloat while the investment struggles? Could it create other opportunities? We do that, in part, so we can limit the downside.
Even in the worst real world examples of market downturns they rarely last more than 18 months. One way we protect against such downsides is by planning for three years. If the market dropped dramatically how can you ride out the storm for three years in an extreme worst case scenario? We find out. It also requires having enough cash, assets, and debt available to cover you for those three years, until the investments in the market can rebound.
It’s not just looking at market events. We will also run other scenarios around job losses, illnesses, divorce or death. We don’t always discuss these ideas in extreme detail, but we build in the contingencies. Our clients trust that we provide this intricate disaster planning.
It’s also why, when a Coronavirus-type of event occurs, our clients are ready. They have major shocks built into how we operate and we have discussed it at length. Anything less would be irresponsible. In these scary times, many of them just want to know how they can act, since their other bases are covered. Here’s why this planning process provides the opportunity for action, as opposed to fear, in times of turmoil.
When you’re aware and expecting the unexpected you do not panic. You know your bills are covered. You know what to expect in your retirement portfolio. You understand how it impacts the growth cycle of your business. Market swings of ten, twenty, thirty percent or more can be scary, but they’re also normal. It impacts your short-term numbers, but not your long-term positions. We encourage our clients to call us with all questions related to volatility because it is inherently stressful and sometimes you need reassurance. But most of our clients do not because we have done our best to address these questions in advance.
Clients that have plans set aside for volatility don’t then require an extra set of funds for safety purposes, as the market swoons. They also don’t try to reduce their risk in the markets to avoid the emotional stress of fluctuations. If you take a structured approach that includes plans for market swings then you can be more aggressive in your long-term positions.
The goal is always risk adjusted returns. Higher risk tolerances, statistically speaking, create better returns in the long term. Utilizing a plan that expects and allows for volatility lets clients open themselves up to higher risk levels and, by definition, better expected returns. The idea is to actively avoid the need for any withdrawals during down markets because cashing out when the market dives is how you lose.
Those that typically struggle the most in downturns are those that aren’t prepared. They overload on non-cashable assets and end up in the position of needing money to float bills and expenses. They then have to sell valuable goods, at a discount. This is a small portion of the population. The majority retract their spending to avoid selling investments at a loss. This leaves those with accessible cash able to bid on underpriced assets while facing a smaller buyer pool. That is the recipe for a home run deal.
Most assume purchasing underpriced assets include buying back into a discounted investment market, which is a great opportunity, but there are other options as well. People sell houses, businesses, collectors items, vehicles and more when the market struggles and they need cash. Those that haven’t planned may need to sell at very steep discounts. Those that don’t need cash can act quickly when such a sale becomes available. This is why my client called, asking where he should place his extra funds.
He recognized that the world had gone on sale. And because of his planning, he was ready to strike.