COVID-19 + What You Should Be Doing Right Now With Your Financial Plan
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Hey everyone, welcome to the Stay Wealthy Podcast. If you are a first time listener, thank you so much for joining us. My name is Taylor Schulte and I am the host of the show. I am also a father of two crazy boys, Sawyer and Sutton, and the husband to an amazing wife, Lara, who I actually met in college at the University of Arizona.

We are all doing well under these crazy, kind of weird circumstances, and I hope that you, your family, and your friends are staying safe too. If you're a regular listener to the show, you know that I'm releasing this episode outside of our normal schedule. Given all this craziness, I just wanted to touch base with our audience and share some thoughts around the financial markets and also COVID-19.

I've been hanging back and I was actually hesitant to publish anything at all because there's just what seems to be an endless amount of news and information out there circling around. And I don't know, I just didn't really know if I wanted to add to all the chaos. But there are a few things that I want to highlight that I hope are helpful to you and your family and friends as you battle through this challenging time.

For what it's worth, this episode is completely unedited. My podcast producer has no idea that I'm publishing this. So just keep that in mind if things sound or feel a little bit different today. And like always, I'll be mentioning some resources and sharing some numbers with you today. So if you want to find any of those, just go to the show notes at youstaywealthy.com forward slash 66. Okay.

Okay, so let's start with the financial markets and your investments, since I know that's top of mind for a lot of you. There are three things that I want to share today. One, at least in regards to the financial markets. One...

I want to share an update on how diversified portfolios are performing right now. Two, a reminder for how I think most people should hedge their investments against stock market risk. And then three, what you can do right now to take some action during a time where we all feel paralyzed. So first, an update on diversified portfolios and how they are performing right now. I want to share this for two reasons. One,

The media loves to focus on the stock market, but most of us don't just own stocks. We also own bonds and sometimes other asset classes. The second reason is a lot of the performance numbers that you're seeing quoted are focused on a very short period of time. So let's put some numbers to this and talk a little further.

As of the close of business last Friday, March 20th, the global stock market is down just over 30% in 2020. However, as I mentioned, most of us just don't own global stocks. And thanks to Ben at A Wealth of Common Sense, he highlighted the performance of some diversified portfolios

using a three fund Vanguard portfolio comprised of the Vanguard total US stock fund, total international stock fund and total bond market fund. For instance, when he ran these numbers,

He found that a 60% stock, 40% bond portfolio made up of those three funds is down about 18.5% this year as of last Friday. So that's compared to, again, the global stock market, which is down over 30%. So almost half. A 40% stock, 60% bond portfolio is down about 12%. But again, that's just for 2020.

If you're a listener of the show, you know that we aren't short-term traders here. We're investing for the next 20 to 30 plus years. And yes, that applies even if you're already in retirement. Remember, we are investing through the end of your life, maybe even somebody else's life to keep pace with inflation, maybe even outpace inflation to create sustainable income streams or fund other goals like charitable giving.

So ignoring some of the short-term stuff, if we look back at the last five years using those same funds I just talked about, a 60-40 portfolio, 60% stocks, 40% bonds over the last five years has a positive 7.5% return. The 40-60 portfolio, the more conservative portfolio, has a positive 10.5% return.

the further back we go of course the better those numbers get so as gloom and doom as things feel right now try to remind yourself that much of what everyone is focused on at the moment is really short term it's not fun but it's really short term and we don't invest our hard-earned money and take risk with it to make a quick buck in the short term if you want to do that go to vegas buy a lotto ticket um

You know, there are other ways to gamble with your money. Successful investing requires time and patience. I know you've heard me say this a million times on this podcast, but successful investing requires time and patience.

Just look at Warren Buffett and read about his path to success. It took a lot longer than most people think. I know a billion dollars is a lot of money, but he didn't officially become a billionaire until he was 55 years old. It took a really long time for him to make those investments, stay committed to them, and then reap the benefits of compounding returns.

While I'm talking about boring financial advice here, like being patient and thinking long term, I also want to take a minute to remind you that the media is not here to help you, at least with your finances. They will never tell you this, but they are loving the current situation right now. Everyone is loving it on the left, the right, the center, websites, blogs, you name it, because more eyeballs and more clicks means more

more advertising dollars if all the media said was stay the course and focus on things you can control and ignore the noise they would have some real explaining to do to their shareholders nobody would tuning in it would be tuning in nobody would be uh looking at advertisements clicking on things so uh just just remember when you're watching or reading the media or news just remember what their motive is they're not really always here to help you again at least with your financial situation

Okay, the second point I wanted to bring up with regards to the financial markets and investing is how I think most people should hedge their portfolios against stock market risk.

If you're a longtime listener of the show, you've likely heard me mention that at my firm, Define Financial, we don't own corporate bonds in a diversified portfolio. We also don't own tax-free municipal bonds. We don't own high-yield bonds. We don't own convertible bonds or James bonds.

Okay, that was a bad dad joke, but you get it. We don't own anything else but U.S. government bonds. The bond portfolios we manage for our clients only include U.S. government bonds and TIPS, Treasury Inflation Protected Securities. Our strategy is a little bit more sophisticated than just buying a few bonds and moving on, but in general, that's what our bond portfolio looks like. Why?

Why? Because of the exact situation that we are in right now. Historically, when stocks go down a lot, significantly a lot, U.S. government bonds have gone up. U.S. government bonds are one of the few asset classes, if not the only, that you can own at a very low cost and moves in the opposite direction of stocks when things get ugly. And once again, that's what we're seeing right now.

As of the close of business last Friday, the iShares 7 to 10 year treasury bond ETF, the ticker is IEF, has a positive total return of 8.37% in 2020. So a lot of information. I'll just say it again. You know, the stock market's ugly right now.

As of the close of business last Friday, the iShares 7-10 year Treasury Bond ETF, again ticker IEF, has a positive total return of 8.37% in 2020.

On the flip side, the iShares investment grade corporate bond ETF, the ticker is LQD, has a negative 16% total return, double digit negative returns for a corporate bond ETF that has almost $30 billion invested in it.

And one more statistic here, the iShares National Muni Bond ETF, the ticker M as in Mary, U, B as in boy, is down just under 10% this year. So muni bonds, corporate bonds all have negative returns, at least investment grade bonds in those categories.

Investment grade bonds and municipal bonds are asset classes that a lot of investors, maybe you, own for diversification. And although they're doing better than the overall stock market, and you could say they are providing diversification, they're still suffering some pretty dramatic losses that I don't think most people are really aware of, or at least aware that they're exposed to that type of risk.

hedge funds private equity unconstrained bond funds structured notes variable annuities all these products get a lot of attention during volatile periods like this because they're being sold as a way to hedge against stock market risk just look at some of the advertisements or material marketing these things

The problem is these are all very expensive products. They might have very, very smart people in the driver's seat, but they're going to charge you an arm and a leg for access or for the insurance protection. And since the underlying cost of your investment, I've talked about this before, the underlying cost of your investment is the best predictor of future returns. For that reason, I just don't think it's prudent to purchase these exotic asset classes, these exotic investments with your hard-earned retirement dollars.

If you want diversification and protection, if you want true diversification and protection against catastrophic events in the stock market, and you want to be able to do it at a low cost, because again, cost is really important, then look no further than U.S. government bonds. And if you want to read more about owning government bonds in a diversified retirement portfolio versus corporate bonds,

I will once again link to an academic paper that one of my lead financial planners, John Luskin, had published in the Journal of Financial Planning. And maybe you don't want to read the whole thing, but the very first page has the bullet points and the highlights and executive summary. So that might just be enough for you.

This all brings me to my third point that I wanted to make about the financial markets right now, which is what you should be doing right now. Maybe you own corporate bonds and you weren't as protected as you thought you might be, or you had too high of an allocation to stocks and you were exposed to more risk than you wanted heading into this major correction.

what should you be doing right now in response? I know that's what's on everybody's mind. What should I be doing right now? I, you know, the, the blanket advice is, is do nothing, stay the course, right? But I know that's not reality. We all want to take action when things are painful, but first things first, I do love using a real estate analogy here. You might've heard me say this before, but I just like to remind everybody of it as a starting point. And I promise we'll get to some action items and things that you can do. Here it is. If you own a million dollar home and

and the value of your home drops to $500,000 because the economy is taking a dive or we're going into recession or something's happening with Fed and the interest rates, if your home gets cut in half, the value gets cut in half, you probably aren't going to rush out to hire a realtor and put your home up for sale.

You're probably going to hunker down, cut some unnecessary expenses out of your life, stay committed to paying that mortgage, paying your taxes, and then you're going to reevaluate things when the market normalizes again. And this same approach should probably be taken with your retirement and investment accounts.

And I say probably because there are unique situations where you might have to sell everything or some things at a loss, even though you know it's not the right move. I understand that when we're in difficult situations like this, sometimes you have to do things that aren't textbook answers in financial planning. But if you have the ability to ride out the storm, the best course of action is to stay committed to the plan that you currently have in place.

If you don't have a plan in place, now would be a time to go and get one. To me, investing your money without a financial plan is like taking a prescription drug without a doctor diagnosing you first. You would never walk up to a doctor in the middle of a party and say, "Hey, should I be taking XYZ drug?" They would say, "You should call my office, make an appointment. I'm gonna ask you some questions, take some blood, maybe an x-ray, and then I will prescribe my recommendation."

so your investments should be you know the same way you should they should be guided by a plan that takes major events like we're seeing right now into consideration you should be able to review your financial plan right now and say yes wow this really sucks i don't like the way this makes me feel but

We plan for this and my long-term allocation was built and tested under the assumption that events like this happen every seven to 10 years. This is normal. Or you should be able to say, you know what? My withdrawal strategy from my retirement portfolio was adopted knowing that the economy moves in cycles and the market doesn't always go straight up. It doesn't feel good, but I know that the strategy I adopted took all of this into consideration.

Maybe you don't want to hire a full service wealth management firm like mine, and that's totally fine. I'm not here to sell you on that. There are hourly financial planners. There are project based financial planners. There are pro bono financial planners. There is no excuse here. Hire a professional to help you put a plan in place before doing anything with your investments. You don't have to hire them forever. You can hire them again for a one time deal, maybe on an hourly basis. And again, if you're in a difficult situation, they're

are pro bono planners out there i'll link to some of these resources in the show notes uh if you're not sure where to begin the search again you can find the show notes at youstaywealthy.com forward slash 66. okay with that out of the way assuming that you have a plan in place here are three things you can take action on right now number one rebalance your investment accounts

So let's say that your investment allocation should be 60% stocks and 40% bonds. Well, as we just talked about, stocks and bonds have moved in different directions recently. So if you look at your portfolio, your portfolio might be closer to 50% stocks and 50% bonds. Maybe not that extreme. I'm not sure, but you have to take a look. But

without a doubt, your portfolio has drifted away from your target allocation. Your investments are now out of line with your financial plan and your investment policy statement. So with rebalancing, along with getting everything back in line how they should be, rebalancing your account or accounts allows you to follow that old adage of buying low and selling high. Because when you rebalance your account, you're selling the things that have outperformed

and you're buying the things that have underperformed. So you're selling the things that have gone up and you're buying the things that have gone down. So take a look at your asset allocation, see where it's at, see if it's drifted and consider processing a rebalance. Make sure you take into consideration fees and taxes and all that good stuff before doing anything. Talk to your trusted advisors, your CPA, all that stuff. All right, number two.

Max out your retirement accounts. So if you're still in the accumulation phase, the market's down significantly, now might be a good time to super fund all of your retirement accounts for the year if you have the resources to do it. Really quick, before you go and contribute the maximum amount in your workplace 401k or 403b and super fund that account, be sure to check with your benefits department to confirm that your plan has what's called a true up provision.

A true up provision ensures that your company match, if you have a company match, will be given to you even if you front load your 401k and max it out before the end of the year. So just check. If you have a copy of your summary plan description, your SPD, that will also tell you as well. So just look for a true up provision or ask somebody in your benefits department.

In addition to your workplace retirement accounts, consider making those non-deductible IRA contributions or backdoor Roth contributions if you're able to and you haven't already done so. Also, and I don't think some people aren't thinking this way, but also if you have a donor advised fund,

or you plan to set one up, now might be a good time to do that and add some dollars to it while the markets are down. Again, in that situation, we're investing for a charity or multiple charities, not for today, but for 10, 20, 30 years from now. So you're able to donate that money, get a tax benefit, invest while the market's down, and potentially give them more money in the future.

If all else fails, if you don't have access to these types of accounts, you're not eligible or you've already maxed them out, a plain vanilla brokerage account will allow you to do the trick as well. So just be sure all of your tax advantage accounts are maxed out. You're taking advantage of all that. And most importantly, you still have an emergency fund intact after all this has gone down. All right. Number three.

The last action to consider, at least for today, consider doing Roth conversions right now. With the market down, it's likely that your traditional IRA and traditional 401k accounts have lost value. This means that you can convert those accounts or some of those accounts to Roth accounts while their balances are low, invest the converted dollars in the Roth account,

with the stock market now down over 30%, and then allow those dollars to recover and compound over the long term in that Roth account. As you guys know, if you've been listening to this show,

Growing wealth in a Roth account is far superior from a tax standpoint, and it gives you a lot more flexibility in retirement since you won't have to take required minimum distributions. Remember, the name of the game is to get as much money into a Roth as possible throughout your working years. If you're retired, there are still some opportunities to do that through Roth conversions.

But the name of the game, get as much money into a Roth as possible. So take a look, run the numbers, do the analysis, see if a Roth conversion right now makes more sense than waiting. A quick side note or reminder, you'll have to pay taxes on the conversion. So be sure that you have the cash available to pay that tax bill. Needing the cash to pay the tax bill prevents many Americans from taking advantage of the strategy, especially when things are tough like they are right now.

So those are the three actions you can consider taking. Of course, there's the blanket recommendations, which is talk to a professional, review your financial plan, communicate with your spouse, stay the course, don't panic, all that stuff. But I wanted to give you some real actionable things that you can consider doing while we're all feeling this way and while we're going through this challenging time.

So those are my current thoughts on the financial markets and the current conditions. Hopefully that gives you some things to think about and actions to consider taking. Please, please, please, and I mean this, don't hesitate to reach out if you have any questions for me. Email address is podcast at youstaywealthy.com.

All right, before we part ways, I do briefly want to talk about the coronavirus or specifically COVID-19. Here's the deal. I don't know anything more than the next person. So I'm not going to make any predictions or sit here and pretend like I know what the financial impact is going to be on our economy, how long this is going to take, what's going to happen to your investments or the financial markets.

I'm not going to pretend any of that. Also, there's enough bad news out there on the topic. So I want to try and stay positive here. What I want to do is share some of the good things that are likely or that I think are likely to come out of all of this once we're on the other side.

Some of these things have been circulating in the media, so they might sound familiar. I am not taking credit for all of them, but I personally found them to be interesting and encouraging, especially with what we're going through. So let me go through a few of these and then we'll be on our way. The first is new leaders are likely to emerge if they haven't already emerged.

Let me explain. I don't know about you, but I'm seeing a lot of people in my life step up in ways that I've never seen them step up before. We've got neighbors and friends offering to go grocery shopping for us so we don't have to leave the house with the kids. Financial planners are opening up time slots for pro bono meetings. People on the Nextdoor app, I don't know if you guys have that, but check it out, the Nextdoor app. People are reaching out to complete strangers with how they can help.

grocery store clerks are coming to work every single day so that we can buy food and household items and take care of our family. We're also seeing this at the highest level, specifically in our healthcare system with medical staff and professionals putting themselves at risk, in danger every single day to fight this thing. So just like we saw post 9-11, ordinary people, just ordinary people like you and I are becoming heroes and leaders. And I think that we're going to become, we are going to be better off because of that.

Number two, better science. And I want to give credit to Scott Adams for this one. A whole bunch of smart people who have never met before have now met or are about to meet. And these smart people are working together on the same team to solve the same problem.

I think we can all agree that these bonds and friendships are likely not just going to disappear overnight, even once this is all said and done. And their combined skill sets will very likely lead to better science and better medicine in the long term. So I chalk that up as a positive, a very likely positive to come out of this.

Number three, pandemic defense improvement. Right now we are getting a real life test and I have to believe that our defense is only gonna improve through all this. I'm not taking sides here and saying that we're doing a bad job, but no matter what, our defense and response to future events will improve.

COVID-19 is very likely not the biggest problem that we will ever experience in this country. So personally, I'm thankful that we're getting this real life test and that our defense will be better in the future when and if something more severe hits us or something similar hits us again in the future.

Number four, home delivery. So you guys probably heard Amazon is hiring 100,000 more people and they're probably just going to keep hiring. Amazon is just crushing it through this environment. And a lot of us are turning to DoorDash, Uber Eats, etc. right now to support local businesses and try to feed our families and take care of ourselves.

Some people have actually predicted that due to current events, restaurants might start to become and look more like kitchens in the future and require less square footage to operate. So not only might that lead to more convenient food delivery and options,

But if that happens, food prices or restaurant prices would likely come down for consumers as well since restaurants will have lower overhead and require less square footage. So it's kind of an interesting thing there. But regardless of that actually happens or not, home delivery is certainly winning right now and is only going to get better from here. Number five, we've all heard this.

But hygiene, I think hygiene is permanently improved here. You know, a lot of us have good hygiene habits and wash our hands multiple times a day and all that. But without a doubt, new hygienic habits are being formed right now by a lot of people. How many lives might these new habits save? I don't know. But some have actually said that we could come out ahead after all this is said and done, meaning that long term due to these new hygienic habits, we're going to have a lot of

we could save more lives through better hygiene than COVID-19 took from us or will take from us. Maybe that's a bit of a reach and you don't agree. There's a lot of unknowns still, but it's not that completely far fetched. So no matter what, hygiene permanently improved going forward. Number six.

Fitness and health. I'm not sure about you, but I've worked out more in the last two weeks than the last two months combined. I've taken more walks in my neighborhood than usual, and I've seen a lot of my community and neighborhood doing the same thing. Along with going out to eat less and being more mindful of our diets,

We're also finding unique ways to exercise from home and realizing that we don't necessarily need to drive, you know, 15, 20 minutes to a fancy gym. My wife and I actually spent the weekend completely reorganizing our garage so that we could not only entertain our kids in there when it

It's been raining lately, but also to stay connected to our neighbors that are walking by while still practicing social distancing. And more importantly, we can get a workout in while all this is happening. So we've gotten more creative. We've adopted more kind of home workout programs. And I think a lot of people are just going to be using this time if they're not already as an excuse to get healthy.

And then lastly, again, you've probably heard this in the media, but online education. I've been a fan for a long time of what some people have coined as reverse homework. Reverse homework, there's a bunch of different names for it, but reverse homework is where students watch lectures from world-class professors at home, and then they attend class, they go to school and attend class to discuss the lecture as a group and work on projects as a group.

It always seems so backwards to me to watch the lecture as a group in silence, right? Just listening to the professor and then go home and do the work on my own. It just always seemed backwards. So I think many students after all this will push for

100% online virtual education, which would bring the cost of education down. But that's a long ways away probably. But at the very least, I think this idea of reverse homework and a lot more online learning is going to become a bigger part of the education system. So that's a win. And I think just definitely chalked up as a positive here. There are hundreds...

Maybe thousands of other positives that are likely to come out of this very difficult time, but I'm going to stop there. Please don't be a stranger. Please shoot me an email at podcast at you stay wealthy.com. If you have any questions, if you just want to say hi, I would really appreciate that too. So just know I read and respond to every one of your emails. So shoot me a note, say hi. Let me know if you have any questions. Again, the show notes for this episode can be found by going to you stay wealthy.com.

forward slash 66. Thank you as always for tuning in. Stay safe and I will be back here next week with our regularly scheduled show. This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial or other professional services.