Not surprisingly, people tend to overestimate their risk tolerance when the markets are going up. The true test of an individual's tolerance is when markets become volatile and performance turns negative. While many – probably most – investor portfolios have suffered losses recently, those losses can likely be recovered by sticking to a long-term investment plan.

And how ARE they reacting, from what you've seen?

Individuals with a financial plan in place tend to react more calmly than those who don't have one. Although it is emotionally unsettling to see portfolio values go down, especially after the prolonged bull market, most people intellectually understand that a down year is not unexpected and that their financial plan accounts for it.

About clients' appetites for risk, I've read that people with less financial acumen don't accurately judge risk. What are you seeing? 

I don't know that financial acumen is necessarily the culprit, but I agree that not everyone has assistance from financial professionals who can help them understand, and more importantly, quantify the risk they are taking. For instance, recognizing that your retirement account could lose value is a lot different than knowing that it could be down, say 15% in a single year.

In terms of appetite for risk, I have seen individuals on both sides of the spectrum and everywhere in between. Some view downturns such as the one we're seeing now as an opportunity to put cash to work or to rebalance a riskier portfolio, while others are looking to de-risk (or go to cash, which I do not recommend!).

People tend to be concerned about the economy and try to translate it into market performance. However, while the two are related, they do not necessarily correlate perfectly and the stock market isn't always an accurate reflection of the economy. Stocks usually factor in the future while economic activity is more about the present and what's in the rearview mirror. The equity market is considered a leading indicator and it historically finds a bottom  long before there are signs the economy started recovering.

If an individual's retirement plan is currently not well-diversified, is it too late to establish a sustainable financial plan? 

I don't think it's too late to take action to rebalance a portfolio that might not be well-diversified, especially if it's to ensure better positioning for the recovery (whenever that may be). Now is also a great time to reassess what's important and establish goals, like how long an individual plans on working, the amount of income one would need to maintain the same lifestyle during retirement, etc.

Individuals can create a comprehensive plan that encompasses how diversified and conservative or aggressive a retirement strategy should be to meet one's goals. Establishing clear and measurable goals is a great place to start and now is an ideal time to go through that exercise.

What is a typical strategy and is it working?

A typical strategy starts with establishing quantifiable and achievable goals, timelines and risk tolerance. A holistic financial plan incorporating these three elements (among others) can then be put in place to provide a roadmap for realistic savings and an appropriate investment strategy.

This disciplined approach works because it helps with accountability and tracking progress over time, which in turn helps with reducing stress about money. It's really about making it easier for individuals to take control of their money instead of having money control them, and it allows them to make the most of their assets and ensure future goals can be met.

Do you see any potential ramifications to provisions of the CARES Act?

Speaking only about provisions of the bill affecting individuals, I would hope that the ramifications all turn out to be positive. Perhaps the biggest retirement-related change is the suspension of all required minimum distributions (RMDs) from retirement accounts in 2020. Skipping distributions in 2020 can be a huge benefit to retirees as it allows them to leave their investments alone for a year and let them recover from the market downturn. A mandatory distribution in 2020 would have caused a disproportionately large taxable distribution because the minimum withdrawals for 2020 would have been based on account balances as of December 31, 2019, when the stock market was near record levels.

One area that could become problematic relates to the legislation easing the rules for accessing retirement accounts, such as the standard 10% penalty for early withdrawals being waived. My concern is that there are key moving pieces – how much to withdraw, when to repay, tax consequences of the withdrawals and timing of the tax payments, etc. – to take into consideration when deciding to take a distribution or a loan from retirement accounts.

Additionally, people may need to make decisions in a hurry about the distributions without having a comprehensive strategy in place. For instance those individuals may underestimate the tax consequences and their ability to make the tax payments associated with the distributions. Another possible outcome could be that they may not be able to put the money back in the retirement accounts, even with the allowed three-year period.

So should people avoid taking distributions from their retirement accounts, even if the standard 10% penalty for early withdrawals is waived? 

Yes. I understand that people are going through tough times, but taking money out of your retirement account at the wrong time can have long-term effects. Waiving the early withdrawal penalty helps, but with account values down, I would go as far as saying that tapping into your 401(k) or IRA should only be considered as a last resort to help bridge the gap.

Should we still be talking about the SECURE Act? 

Absolutely. The CARES Act offers some short-term relief, but the SECURE Act is intended to be permanent, raising the required minimum distribution age to 72 (up from 70½), removing maximum age limits on retirement contributions (formerly capped at age 70½) and eliminating the option for non-spouse beneficiaries to stretch IRAs. These are all important elements that should be thoughtfully considered when crafting and refining a retirement plan strategy.

Does the "stay calm and don't be tempted to tweak your investments" advice really work with people? Aren't they right to worry?

Emotionally "staying calm and carrying on" is difficult to do in any highly volatile environment, particularly the one we are in now, and it is perfectly normal to feel concerned. However, history has proven that things eventually do get better. When people are tempted to make changes, it is important to understand what's driving the desire for the change and the potential consequences, both short term and long term.

Talking through their concerns and the pros and cons of various options – including staying the course – supports making informed decisions and stay the course. When these discussions don't produce the necessary comfort, then minor tweaks are okay, especially if someone's plan is no longer well positioned as a result of COVID-19. I would simply caution against drastic, knee-jerk reactions to markets (especially in our current volatile times) when fears – not fundamentals – are the primary driver.

Is COVID-19 changing your approach to communications, investing, advising?

The pandemic and associated stay-at-home orders have certainly changed how we operate, especially how we communicate with clients and our colleagues. As you might imagine, our videoconferencing usage has gone up significantly. I foresee this trend to continue as it is unclear how and when we will be able to return to our physical offices.

We've also increased the amount of communication to keep clients updated on important developments that may affect them or planning strategies they should think about, like Roth IRA conversions, inter-family loans, debt refinancing opportunities, etc. From an investment standpoint, while we took the opportunity to harvest tax losses where and when it was appropriate, we continue to rely on a well-diversified investment methodology as we believe it provides the best means for achieving long-term investment success.

READ MORE:

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