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What steps should my financial advisor be taking day-to-day when markets are this volatile?

It takes proactive steps to manage a long-term financial plan. Aaron Gray explains how advisors add value through rebalancing, tax loss harvesting, and diversification strategies.

Transcript

Tim Maurer:
Tim Maurer back with another episode of Ask Buckingham, a new video podcast designed to bring clarity in the midst of confusion by connecting your great personal finance questions with straightforward answers from industry thought leaders.

Tim Maurer:
Today’s question will be answered by Aaron Grey, longtime wealth advisor and Buckingham’s director of planning integration, and also probably the fastest speed talker that we have at the firm. Aaron, what steps should my advisory team be taking day to day when markets are this volatile?

Aaron Grey:
Well, we’ll take this one slow, Tim. I put the response really in two categories. There’s two main things we want to be doing for clients right now. The first is, it may sound trite, but you know what? We want to hear from you. We want to talk to you. We want to understand that you’re okay.

Aaron Grey:
We want to hear where are you? Are you connected with people? Is there anything you need? And just connect on a human level. Beyond that we want to understand, obviously this crisis, it’s impacting all of us in a lot of different ways. How specifically is it impacting your financial situation, income? If you’re retired or otherwise, do you need money or should we be planning for something in the near term just tactically in terms of money coming here or there. That would even include if there are other family members that you plan to provide any financial support to or be a health care resource for.

Aaron Grey:
All of those kinds of things so that we can tactically understand what your near and intermediate term needs may be. Then the other category is, and this is kind of blocking and tackling, which frankly Tim as you know, happens all the time no matter what through the lifetime of a client. It just happens a lot more frequently right now as the markets are so volatile, is we are looking at portfolios and we’re looking at two major opportunities that we know we have control over here.

Aaron Grey:
One of them is called a tax lost harvest, which means in a taxable account, when you own an asset that drops in value and it is a value below what we paid for it, we actually have the opportunity to sell that asset at the current level and realize a capital loss. Now when we do that, we don’t just park the money in cash because we know that selling stocks when they’re low is not always such a good idea. So what we do is we sell and then we immediately re-buy something very similar to what we just sold.

Aaron Grey:
So we keep your pie chart really still on track in terms of your asset allocation, but what we’ve done then is we’ve realized they lost. That becomes an artifact that we get to use on your tax return this year. It’s called a capital loss and we can use it as a tax write off against any other capital gains you get for the year to a small extent against ordinary income, so other income that you’ve earned. If you don’t use it all up this year, we just roll it on over to the next year and do that year after year on the tax return to kind of create some additional tax efficiency, tax savings on the tax return for the next handful of years. That is one tactical thing we have control of that we are looking for those opportunities to do across the board.

Aaron Grey:
The other is we’re doing something called rebalancing and hopefully this is a term and a concept that is not foreign to most of our investors, but it’s important to understand. I talked about our pie chart. We have different spices with that pie and kind of targets for each different asset class. We have those for a reason. We’ve built those into your retirement plan. We’ve stress tested them. They’re a good match for your risk tolerance. So when the markets go up and down, they get that target that we liked so much and they get it all out of whack and so once it passes a threshold … I’ll give you an example.

Aaron Grey:
Say that there’s a 50% target for stocks versus bonds. Well, in good stock times maybe that drifts up to 60% stocks and in bad stock times maybe that drifts down to 40% stocks. Along the way we break a tolerance and we say, “Okay, that’s far enough away from our 50% target that we want to go in there and take action.” What we’re doing now is we’re taking action. We are selling the one investment that most clients own, that is actually up in 2020. You heard me correctly. There are investments that are up.

Aaron Grey:
Fixed income bonds have actually had a nice year. As stock markets go down, bonds sort of hang in there. They have gains. We are realizing a little bit of those gains, bringing them back down to 50% in that target I gave you and now we have some fresh cash and [inaudible 00:04:15] on the sideline. We’re going in and we’re buying stocks back up to where they’re supposed to be, to 50% in that example. What that does is that constantly has us selling something that is high and buying something that is low, which we know from the textbooks is what we’re supposed to be doing, but what we also know is that our brain chemistry tells us not to do that.

Aaron Grey:
When we open up a statement and we see red numbers, and we see green numbers, we say, “Oh geez, I want to get rid of these dogs and I want to buy all this stuff down here, this green that’s making me money.” That is the same fight or flight instincts that is very useful when we see a bear in the woods, but not so useful when we’re managing portfolios. This rebalanced discipline that is built in to every client engagement that we work with will, on a discipline basis, have us going in and always selling high and buying low.

Tim Maurer:
Excellent. So even though we are in the business of longterm investing and looking at asset classes, more passive than overly active for sure. It’s not like we’re just sitting idly by in times like this. We’re taking advantage of what the market is doing, even when the market is going down, through the mechanisms of tax loss, harvesting and rebalancing. I do want to remind everyone that every investor is different and every asset is different, and every asset class is different, and every account in which it’s held is different. So you’ll need to double check with your tax advisor, your CPA preferably, in order to ensure that you fully understand the benefits of tax loss harvesting.

Tim Maurer:
On the rebalancing side, Aaron, it’s a tough time to do this. You acknowledge that it could be a personal almost emotional challenge. What if I am sticking with the plan, but I really just don’t want to sell that one asset that is booming in the portfolio right now and buy more of that asset that is going down. Is that okay with you?

Aaron Grey:
Well, it’s a conversation that we’re having. There are certainly those that feel that instinct and really probably have that bias. Entering a conversation, and I would say in most cases in client conversations, by the time we talk through what it is we’re planning to do and why, and they understand that it’s part of a plan, and it’s a plan that was made during objective times, and it’s actually documented inside the investment policy statement. Then the light clicks and they say, “You know what? This does make sense. Let’s go ahead and do that.”

Aaron Grey:
In other cases there’s … Listen, an investment plan only works if you can stick with it. So what we’re discovering, and this is another unique opportunity right now in the market, is a reintroduction to risk and what risk really feels like. We had 12 years of pretty strong, pretty comfortable, low volatility returns since the credit crisis. We are experiencing what it’s like to be an investor now in volatile asset classes. So check in with that.

Aaron Grey:
Now if you can, if you evaluate that and you decide that you know what, this current portfolio I’m in now may be not for me anymore, maybe I overestimated my ability to deal with risk. Understand that and mark that down, and maybe put a pin in it if you can. This will recover just like every other stock market has recovered before. Great time then once we’re in recovery mode to go back and revisit the investment policy statement and maybe look at a different investment allocation. That’s a conversation you want to have with your advisor.

Aaron Grey:
What you’d like to ideally avoid doing is making these massive changes to your portfolio during this time where markets are all really low and we’re all kind of feeling the emotion of what’s going on, just both in the public health situation and also in the economic stock market situation. So you want to do the best you can to remain objective and understand that there is a plan in place. So let’s go ahead and execute the plan and let things settle down, and then we can look at modifying the plan, which by the way, Tim, it’s not a function typically of stock markets. It’s a function of your life.

Aaron Grey:
All of our clients, when they’re young, they might have an aggressive portfolio and when they’re old in retirement, they might have a more conservative portfolio, and we don’t just go from one to the other. It is kind of migration over time and that is part of the reason why we want to annually review a retirement plan, the financial plan, the wealth analysis with the client to revalidate that all of the assumptions and plans within are still kind of checking in with the client, but also revalidate that the current target allocation still make sense because it will make sense to kind of to shift that thing over time. But we’re talking years and decades, so nothing needs to happen quickly there.

Tim Maurer:
Yeah, I love the way you pose this. It begins with a conversation. It begins with advisors asking questions, just getting caught up to see how it feels to be a client in this situation, and then taking a look at the tactical things we can and perhaps should be doing in circumstances like this. Thank you so much, Aaron Gray, and thank you for tuning into this episode of Ask Buckingham.

Tim Maurer:
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