HCR Wealth Advisors and the Power of Patient Investing

For months now, the markets have reacted to every bit of good news about a vaccine. One investment newsletter even proclaimed on February 27 that, “The coronavirus vaccine is here! We predicted it a few weeks back, but it got here even faster than we thought. So even though you’ve seen a dip in the markets this week, don’t panic. This ‘coronavirus effect’ on stocks is temporary.”

The three biotech firms touted in the newsletter may indeed play a part in the eventual rollout of a vaccine against the coronavirus, but the newsletter’s timing couldn’t be more wrong. And, yes, opportunities do exist to make money as individual stocks shoot up 13-30% in a week, as those had done.

Is there money to be made in volatility? Absolutely, if you are as good at the timing of ‘getting out’ as you are of ‘getting in.’ One question is, “What is your appetite for risk?” Another is, “Is that really how you want to manage your retirement portfolio?” These are the questions best answered with the help of firms such as HCR Wealth Advisors.

How the pandemic has affected retirement savings

The pandemic has no doubt affected the retirement savings of many Americans. The Dow Jones Industrial Average lost over 15%, going from its February 2020 all-time high of 29,569 to hovering around 25,000 in mid-May.

In between, it suffered several heart-stopping trading halts. (Market drops of 10% trigger a circuit-breaker mechanism that pauses trading for 15 minutes.) On March 12, the Dow officially fell to bear-market status by being 20% off its February 12 high. On other days, the market closed below 20,000, for a momentary loss of 32% from its all-time highs.

These shifts have a direct impact on the value of 401(k)s, IRAs, and investments, whether in individual stocks or mutual funds.

Many investors pulled money out of their plans at different points along the rollercoaster ride. Some acted early and preserved the run-up in the market. Others locked in painful losses by selling out of fear of even more than the 32% drop. How much they gained or lost depended, obviously, on what they paid to get in initially, especially considering most portfolios would be the accumulation of buy-ins over many years.

Unless investors were handling their portfolios entirely on their own, ideally, they would have consulted with an HCR Wealth Advisors-type advisory group to determine the impact. And, a well-qualified planning firm would have helped shield them from losses in the first place by allocating assets based on the investor’s age and risk profile.

What are the options going forward?

For those who have held their positions and left their retirement accounts and investment portfolios intact, what is the best strategy going forward? Do they ride a wave back up? Do they cut any losses now that the markets have recuperated somewhat? Do they hold steady?

A strong advisory team such as HCR Wealth Advisors helps its clients put a plan in place for times like this.  The plan is designed in part to a client’s risk tolerance and how they see the future.

As usual, there are two schools of thought.

The ‘glass-half-full’ group – This group sees the green shoots in the economy without ignoring the pain caused by lost jobs, lost businesses, weakness in the global economy, and the inflationary effect of government stimulus programs. What are ‘green shoots?’ They are signs of economic recovery or positive data during an economic downturn.

Because the U.S. is facing an event-driven bear market – and not a structural one as occurred in 2008 – they expect that the recovery will happen sooner than back then.

By now, all states have made some moves to reopen and stimulate the economy. For the past six weeks, U.S. car sales have been bouncing back, reducing the spread of year-over-year sales from down 50% to down 20%. Mortgage applications have improved for five weeks and new home purchases and chain-store sales are climbing. And on top of all of that, both restaurant bookings and air travel are showing signs of life.

The ‘glass-half-empty’ group – This second group is less convinced. Many already foresaw dark clouds of an economic collapse long before the world was fighting this pandemic. Today, their focus is on emerging crises caused by inflation, debt, recession, and a decimated economy. The shock of rapid economic contractions gave policymakers and business leaders no time to adjust, so reversing the situation will be that much harder.

They see two ‘drags’ on any improvement: weak demand as Americans hesitate to return to normal participation in the economy, and weak employment resulting from the number of shuttered businesses that could not survive until individual states could reopen.

The first drag will have the most significant impact on economic activities that require close proximity (cruises, travel, sports, theme parks, concerts, and restaurants at full capacity) – mostly discretionary services. The second will affect smaller businesses more than large businesses because of their more limited financial staying power. And smaller companies are consistently responsible for more net job creation. But, most of all, this second group sees no possibility of economic recovery until a vaccine is available for all, especially with a second wave of coronavirus in the cards for the fall season.

Both groups – ‘glass-half-full’ and ‘glass-half-empty’ – feel strongly about their respective positions, with little flexibility. Those beliefs are baked in.

What one factor should influence your retirement savings decisions?

When it comes to retirement savings, the primary influence should be ‘time left before retirement.’

Investing for retirement is vital at any age. And, as we know, the younger you start, the better off you are. But the same strategy is not ideal for each stage of your life. As you move from decade to decade, your life focus will change, and so will your attitude towards risk. Younger investors can tolerate more risk as they have more time to make up for market reversals. Those closer to retirement will have less time to recover from losses.

‘Asset allocation’ is used to adjust your portfolio to reflect your changing risk profile as you age. There are several asset classes, or categories of investments, such as stocks, bonds (or fixed-income securities), cash and cash equivalents, commodities, real estate, and futures and other derivatives. Each category behaves differently as the economy goes through booms and busts, and each one brings a unique level of risk and return. Riskier assets, such as stocks, are seen as offering a higher return. Less risky assets, such as bonds, are expected to bring lower yields, but provide greater safety.

HCR believes that managing risk is the most important part of investing because volatility and market sell-offs are a normal part of investing.

A 20- or 30-year-old’s portfolio would likely be heavily weighted with stocks, but with limited bonds. By age 50 or 60, the participation of stocks and bonds could be about equal. And, in many cases, other asset classes would be included to add to the diversification of the portfolio.

This aspect of retirement planning is where a trusted advisor can offer great value, both in helping you define your risk profile and in aligning your existing retirement plan with that risk. HCR Wealth Advisors can provide a client-specific solution.

How asset reallocation can reinforce your retirement plans

As you enter your sixties and get closer to retirement age, you may want to switch some of your riskier investments into safer bonds and money markets, for example. A wealth management firm can help you make that decision and transition, employing beneficial tax strategies as you sell stocks, funds, or other investments.

You may also choose to increase your 401(k) and other retirement plan contributions by maxing out each year if you are still earning income. And, as the strategy of maximizing tax-free withdrawals in retirement is so attractive, any income downturns brought by the pandemic in 2020 may provide an opportunity to convert traditional accounts to Roths.

If you already have a detailed financial plan in place – one built on your goals, objectives, risk tolerance, and time horizon – there may be minor adjustments to make, possibly to benefit from opportunities, but there should be no need to respond to a market panic, which can lead to irreparable damage to long-term results.

About HCR Wealth Advisors: HCR Wealth Advisors believes in providing its clients with a detailed financial plan tailored to each client’s wants and needs, and that empowers the client to weather periods of increased volatility with confidence. The greatest way for a client to succeed is to stay invested and focused on short- and long-term goals.

This article is provided for informational purposes only and should not be interpreted as investment advice. HCR Wealth Advisors is not affiliated with this site.