Hope Plan for the Best and Expect Plan for the Worst

I hope this post finds everyone safe and as comfortable as possible in these unprecedented times. I have spent the last several weeks reaching out to folks, reviewing portfolios, updating financial plans, reading research reports and contemplating what comes next. There is a lot weighing on folks minds these days - the markets, risks of losing a job, parents in nursing homes, kids home from school – the list is endless. My role at a time like this is to be a voice of reason and to offer the best advice I can to help folks any way I can. While my main focus is on planning and investments, I have also been swapping tips with other parents about homeschooling, learning to bake my own bread, and trading best show ideas on Netflix.

On the markets, we have had quite a volatile start to 2020 to say the least! Markets sold off significantly (and unexpectedly) starting in late February and we have seen a partial recovery so far in April. While the initial recommendation of myself (and I suspect most Advisors) - “do nothing” – has paid off in the short-term, this is not a long-term strategy. I want you to know there are some things that can – and should – be done now. There is no one-size fits all approach, however. The ways to do this will greatly depend on each investor’s unique goals, time frame and risk tolerance.

Specifically, there are changes that can be made to upgrade the portfolio with an eye to the future. The approach I advocate is to look forward with two possible futures in mind. To proverbially “hope for the best and expect for the worst”. For investors, it can be more appropriately stated as “plan for the best and plan for the worst”. This situation has helped to show the benefits of being prepared for bad times. Many of us have started to stock up on canned goods, rice and pasta plus stock our freezers while we can. While we hope we do not need them, there is little harm in having extra food and supplies on hand, but significant risk if you don’t. The same can be said of investing.

How can an investors do this?

Investors can plan for the best by:

1. Having some Equity exposure;

2. Rebalancing Portfolios;

3. Seeking to Upgrade Portfolios;

4. Considering a tilt to Small Cap stocks; and,

5. Taking the long view.

Investors can plan for the worst by:

1. Recognizing that bad times can (and inevitably always do) happen: This topic requires a bit more context, as follows:

   1. For those 10 years or more from retirement: as per point #5 above, you can afford to take the long view. Your cash-flow comes from your income and you are still in a savings mode. For this reason, unless you are uncomfortable with the risk (which is a perfectly acceptable feeling that can (and should) be respected and factored into portfolios) you can afford to maintain a Growth-oriented investment approach with as much as 100% fully invested in Equities. Try to see these types of downturns as an opportunity to buy stocks at lower prices.

       

      Bottom line: have a mindset to embrace volatility.

       

   2. For those closer to (or in) retirement: it is crucial to consider your cash-flow needs and to build and maintain a cash and fixed income reserve to cover at least 3 – 5 years’ worth of expenses, plus adding a “tactical sleeve” (which I discussed in a blog post last year). Having at least these two things (plus possibly even more Fixed Income depending on your unique risk tolerance) is critical, as they will give the Equities in the portfolio time to recover from downturns like this.

For my clients I recommend separating portfolios into discrete “buckets” of Cash and Fixed Income, Tactical Investments, and Equities.

1. Trying to be stoic and remain level-headed in the face of the volatility;

2. Adopting an “opportunity mindset”; and,

3. Introducing a Tactical Sleeve (if you don’t already have one).

    

I could have added more detail on each point, however I opted to keep it simple with point form for the purposes of this post. I am in the process of planning a webinar on these subjects and will announce it here. Please reach to me directly at jeff.ker@rbc.com if you would like to be included on my mailing list.

Let me leave you with this thought. At times like this it can feel overwhelming and you may feel the urge to panic and consider giving up entirely on stocks. Or, you may take the opposite view and opt to “do nothing and don’t panic” as you believe things will inevitably recover. While I certainly fall in the latter camp and believe that folks should not panic, I strongly believe there are things that can and should be done now in portfolios. If you are looking to speak with someone who can provide a voice of reason in the midst of these unprecedented times, please feel free to call me directly at 416- 231-6528 or email me at jeff.ker@rbc.com.

All the best!