The Coronavirus Outbreak Requires Rational Thinking to Protect Both Your Health and Wealth

Following are some tips for protecting your nest egg when fear is infecting the markets
Updated: Thu, 03/05/2020 - 12:43
 
 
  • Following are some tips for protecting your nest egg when fear is infecting the markets

Wash your hands. Keep travel to a minimum. Work from home if you can. These are all good strategies for staying healthy as COVID-19 continues its spread.

But there’s another health concern out there that needs attention: The health of your wealth.

Last week, markets delivered a historic drop in stock prices, sky-high volatility and fears that the economy could slow significantly in the first half of 2020 or longer. After more than a decade of U.S. economic growth and record-breaking stock performance ― including more than 30% gains in the S&P 500 in 2019 ― it’s no surprise that investors are feeling the shock.

With all the upside of the past few years, it’s understandable that the basics of good financial hygiene may have been overlooked. But it’s not too late to get cleaned up.

Stay Diversified

Last week, high-quality bonds gained in value, especially U.S. Treasuries, as stock markets around the globe kept falling. For portfolios with a significant allocation to high-quality fixed income, the downturn last week was not nearly as scary. In fact, through February, high-quality U.S. bonds were up nearly 4 percent vs. an 8 percent drop for the S&P 500.

When I say diversified, I’m talking about your entire asset base. If, for example, you have a variety of stock options through your job, count those in. This is especially important for those with high ratios of equity-based compensation, like those in Seattle’s technology industry. Also, consider your real estate holdings. There’s no magic number, as factors unique to each individual investor determine their optimal level of diversification. But, for those who’ve kept their eggs in a limited number of baskets, it might be time take another look.

Take the Long View

Make sure you have enough cash and ongoing income for the near term, while adhering to a longer-term investment plan with only small adjustments needed for current events. Such a plan can provide the confidence required to stay invested through turbulence, such as that we are seeing now, and not be tempted to lock in a loss and potentially miss a rebound. It is nearly impossible to time the markets consistently, especially when a threat is something like a new virus, whose ultimate duration and impact remains unknown.

When prices start falling significantly, many are tempted to sell. Before you do that, though, realize that market moves can happen quickly in either direction, and the danger of getting whiplash is great. Also, if you sell in taxable accounts, you may owe sizable capital gains taxes all at once. As enticing as selling may be, it might end up being a costly mistake.

Rebalance

With the runup in stocks, especially in 2019, many people ended up having much more in equities than they realized. While portfolios should be rebalanced on a regular basis, this is especially valuable during downturns. Rebalancing forces you to do some opportunistic buying and selling, so you’re better positioned to benefit from the relatively few (and hard to predict) days when stocks really put on gains. Taking a proactive approach to rebalancing also gives you an opportunity to look for opportunities to sell some securities at a loss in order to offset capital gains taxes.

If your portfolio truly fits your finances and risk tolerance, it can make it through a market downturn and be positioned to thrive once it’s over. But we all know the feelings of fear that can come along with uncertainty, especially from something as severe as a global pandemic. Building a suitable balance among stocks and bonds, international vs. domestic, and sometimes alternative and private-market assets can help with diversification and potentially soften downturns like we’re facing now.

So, keep your financial hands working and wash them regularly. Doing so will lessen your anxiety during times of volatility and help you keep health in your wealth.

David Baker is director of investment strategy and research at Seattle-based Laird Norton Wealth Management. He can be reached at d.baker@lnwm.com or 206.464.5100.