Keep Your Money Growing with Two Simple Steps
Growing financial wealth in today’s environment has been a struggle. Whether it’s the wide swings in asset prices that make it hard to decide whether to stay in or get out the markets to the dour economic conditions that have negatively affected business earnings. Finding the right strategy to grow your wealth in a world locked down truly has been a challenge.
So, what can households and investors do to make the right decisions to grow wealth given today’s challenges? Well, we believe that when individuals focus on a process and not an outcome they can create, grow and preserve financial wealth even in this difficult market and economic environment. More to the point, we believe that individuals can still grow their money today by utilizing and staying committed to a systematic wealth management process.
Figure 1: The Wealth Management Process
Growing Wealth Through a Systematic Process
In our report last week, we described how a wealth management process works and how it can help individuals build wealth that can endure the test of time. To recap, our wealth management process focuses on three key points to building enduring wealth:
- Being intentional and efficient with your time and resources
- Making your money work for you and
- Taking steps necessary to protect your hard-earned wealth.
In other words, a process focused on creating, growing, and preserving financial wealth. So why is the process important? Well, we believe it’s important because a process enables us to be consistent in the way that we align our wealth habits with our life’s passions and purpose. A process also provides discipline and being disciplined can help generate the productive assets that we need to pursue the more important things in our lives.
Create Before You Grow
Where to begin? Well, we recommend starting with creating wealth before trying to grow wealth. More specifically, we suggest beginning with the first step in our Wealth Management process. To us, Creating Wealth means:
- Being intentional with your money and identifying your life’s vision and purpose
- Maximizing your value to others to increase your earnings potential and
- Optimizing your net worth so that you have a base of money from which to grow wealth
To be sure, a key reason we stress the importance of the creation process is because it sets the base for generating productive assets that you can use to make money work for you. Crucially, this process enables you to pursue the more important things in your life and in a relatively shorter period of time than you could otherwise.
Figure 2: The Components of Creating Wealth
So, let’s quickly revisit some of the key components of creating wealth that we covered in our report last week, beginning with intention. When we talk about intention what we mean is the way that you align your financial resources with the vision and purpose that you have set out for your life. In other words, intention gives your money a reason for existence. It also means that you may be more inclined to create wealth when your savings and spending plans reflect what matters most to you now and into the future.
Maximizing value is the second wealth creation component that we wrote about last week. That is, using your innate talents to take your career or business to the next level. This means doing the kind of work that gets you up early in the morning, energized and puts you in a state of flow. This is important because, the world tends to exceedingly reward those individuals who are excellent in the things they do and the way they show up to help other.
The third way you can create wealth is by optimizing your net worth. This is done by allocating more of your attention to saving money and by reducing bad debt. Put differently, it means using debt to acquire assets that will appreciate over time or enable you to maximize the value that you provide to others.
Taken together, we believe that these three wealth creation components are key to setting the foundation to building enduring wealth. This is because when followed in a systematic fashion, the components can be used to help generate the crucial financial resources you need to make your money grow over time.
Figure 3: Three Key Components of Growing Wealth
Make Your Money Work for You
So, we’ve just talked about creation and how the first step in our wealth management process provides a base from which wealth can grow. Next, we’ll walk through how you can actually grow your wealth. To start, we’ll need three key components for growing wealth:
- Accumulated savings
- A rate of return
- Time
When taken together, you can use the Law of Compounding to grow your money in our current framework. More specifically, we mean earning a return on your savings, then investing that return back into your savings and repeating the process over a given period. Let’s take a closer look at the components necessary to grow wealth.
Figure 4: Law of Compounding
Savings is the first ingredient that you can use to grow wealth. To be sure, it’s primarily through the wealth creation process that we establish a solid foundation for growing financial resources. That is, without some form of savings developed during our creation process we have no base from which to grow money.
Our second growth ingredient focuses on a rate of return. For example, this would be a return that you could get from a savings account at a bank or the expected return from investing in the stock market. Whatever the case, the rate you receive will be either higher or lower depending on a number of factors, including time and the risk characteristics of your savings vehicle.
“…there are no shortcuts to building enduring wealth.”
Finally, to grow wealth you need to allow your returns to accumulate over time. While many of us wish we could grow our money in the quickest way possible, the fact is that there are no shortcuts to building enduring wealth. In fact, some research has shown that growing enduring wealth is typically accomplished through a consistent systematic process and done over an extended period of time. So now that we’ve talk about the three ingredients necessary for growing wealth let’s move on to looking at how this process works in practice.
A Practical Example
So how can you practically make your money work for you? Well, let’s look at an example. And we'll begin by going back to our three ingredients for growing wealth: accumulated savings, a required rate of return and time. In our example here we’ll assume that you’ve accumulated $100,000 in savings through the creation process. More specifically, you’ve done so by being intentional with your money, maximizing your value to others and optimizing your net worth.
Figure 5: Growth at 1% Over 10 Years
Let’s also assume that your savings is held at a bank and that bank offers you a 1% annual rate of return. So, where does this leave you? Well, in one year, your savings will theoretically grow by $1,000. Therefore, by the end of year one, you would have $101,000 in savings. If you were to repeat this process over a 10-year period, your savings would have grown at a compounded rate by about $10,500 and in excess of $500 more than a simple rate of return.
Now let’s assume that we increase your rate of return from 1% to 5%. How would this affect your savings? Well, with $100,000 earning 5% compounded annually the value of your savings would increase to $105,000 after year one and over $110,000 in year two. In fact, after 10 years, the difference between a compounded return and a simple return is nearly $13,000!
Figure 6: Growth at 5% Over 10 Years
What’s more the compounded excess return at 5% is nearly 28x larger than the 1% return when measured over a 10-year period. So, the point here is that with a little time and a decent rate of return you can make your money work for you in a very meaningful way.
Keeping Your Money Growing During Uncertain Times
So, what can you do right now to keep money growing during these uncertain times? Let’s review the two key points we’ve already touched on. For starters, consider your process. It will be increasingly difficult for you to grow and build enduring wealth if you’re undisciplined in the way you create wealth during this time of economic volatility and uncertainty.
If you’re serious about growing wealth, we recommend that you start by taking the time today to gauge your wealth creation habits. You can start by going back and reading our last report. But generally speaking, this includes evaluating the alignment between your wealth habits and intentions, how you’re maximizing value for your employer or clients and the extent to which you are saving and using debt wisely.
“The stock market is a device to transfer money from the impatient to the patient.” –Warren Buffett
The other thing that you can do to grow wealth in today’s environment is to keep in mind that enduring wealth can grow meaningfully when given time and a reasonable rate of return. Financial markets have experienced wide swings in prices lately. And it’s also likely that non-financial assets (like real estate) could see downward pressure in the coming months as well.
Our point here is that there may be a temptation to chase swings in the markets in an attempt to catch an asset while it’s on sale. Well, rather than spending your time and energy trying to time the markets, or looking for a good market entry point we recommend looking for assets that can provide a generally consistent rate of return and that are in alignment with your long-term goals and risk tolerances. With a little time and a decent rate of return, you can make your money work for you in a very important way.
Figure 7: Time and A Reasonable Return Go a Long Way
In short, we believe it’s still possible to grow wealth even in this challenging economic and market environment. You can do this by sticking to a disciplined wealth management process. This begins by systematically creating wealth and then using the law of compounding to make your money work for you. No matter your current circumstances, we believe that people from all walks can start building enduring wealth today simply by following a few key steps to create, grow and preserve their financial wealth.
The First Step to Thriving Financially: Creating Wealth Today
What can individuals do during this downturn to thrive financially and build, or in many cases, rebuild wealth that has been lost in the past few weeks? By many measures, U.S. economic activity continues to grind to a halt on account of the COVID-19 containment efforts. This is evidenced in various data releases published this week. And it’s also a key reason why some Governors are eager to reopen their state economies.
But the reality is that returning to normal will take time, regardless of how quickly the economy fully reopens. Until then, the fact is that there are no quick fixes to undo the financial damage that has already been done. Yet, we believe that purpose driven individuals can, over time, rebuild wealth regardless of their current circumstances. This can be done by taking the first step in a disciplined, systematic process to create enduring wealth. So, how does this process work?
The Wealth Management Process: Creating Wealth
Let’s begin by level-setting our definition of wealth. To us, wealth means more than simply money taken home from a job or material possessions owned. Rather, wealth represents the financial resources we use today to make happen what matters most in our lives. Put differently, we view wealth as a means to an end rather than an end in and of itself.
Riches do not consist in the possession of treasures, but in the use made of them. –Napoleon Bonaparte
So, when we refer to rebuilding wealth, we are not talking about striving to get back lost income or material possessions. Our efforts, instead, are centered on adhering to a wealth process rather than focusing on a wealth outcome. The aim of this process is to help us generate productive assets that can be used to pursue our life’s passions and purpose.
Figure 1: The Wealth Management Process
To be sure, we believe that individuals from all walks of life can amass the financial resources they need to build enduring wealth. This wealth management process includes three ongoing phases: 1) being intentional and efficient with your time and resources, 2) making your money work for you and 3) by taking steps necessary to protect your hard earned wealth. In other words, creating, growing, and preserving financial wealth. We’ll come back to our second and third points in future reports. For now, let’s focus on the first step in our wealth management process: creating wealth.
Components of the Creation Process
Creating enduring wealth involves being intentional with your money, maximizing your value to others and optimizing your net worth. Let’s explore these points in more detail, beginning with intention. A simple way to explain the concept of being intentional with your money is to consider how two families, the Adams and Bakers, use their financial resources.
Assume for a moment that the Adams family earns a million dollars and they spend a million dollars per year without saving a dime. We could deduce that the Adams family’s intention is centered squarely around consumption. What about the Bakers? They earn a hundred thousand dollars per year, yet they only spend fifty thousand and the rest goes into savings. In this case, holding all things constant, the Bakers have amassed more wealth than the Adams. It can also be safely assumed that preparing for future needs might be a key priority for the Baker family.
Figure 2: Components of Creating Enduring Wealth
From this vantage point, we can see that the way in which money flows through your hands represents the physical manifestation of your closely held intentions. That’s pretty deep, right? Well, the point here is not to wax philosophical but to drive home a crucial point: creating wealth is ultimately rooted in the plan or purpose you lay out for your life. Consequently, you can limit your wealth creation ability when you spend or manage money in a manner that is not in alignment with your life priorities.
Intentional – Definition: done with a plan or purpose
That’s why we believe that the very first step in creating enduring financial wealth begins with being intentional – understanding the vision and purpose you have for your own life. With this understanding in hand, you can then evaluate the ways in which your financial habits align with your internal intentions. Opportunities to create wealth therefore occur when you find reasons to address misalignments between your financial habits and your life purpose. Put differently, you may be more apt to create wealth when your savings and spending plans reflect what matters most to you now and into the future.
The second way you can create wealth is by maximizing your value to others. We believe that you can build enduring wealth by using your innate talents to take your career or business to the next level. That is, adding value, or doing what you are best at for those who need it the most. Gay Hendricks, author of “The Big Leap”, describes this level of performance as the “Zone of Genius”.
And simply put, it’s the kind of work that you do that gets you up early in the morning, excited and in a state of flow. This step matters because it is one important way to increase your potential earning power and thereby build enduring wealth. Indeed, we find that the world tends to reward those individuals who are excellent in the things they do, the unique experiences they provide and how well they show up to help others.
Finally, we create wealth when we accumulate savings and quickly build equity in the assets that we own. Typically, we do this through increasing savings and optimizing net worth. Today, the opportunity to save money has never been easier. It’s true that few households have substantial emergency savings. In some cases, building an emergency savings fund is hard. However, we believe that intention and value maximization can increase nearly anyone’s ability to set aside a portion of their income. Savings is crucial to acquiring productive assets. And these assets can help you grow your wealth and make your money eventually work for you over time.
Equally important to acquiring assets is minimizing unnecessary liabilities. This is crucial because having too much of the wrong kind of debt can leave you in a position that creates wealth for your lender and not for yourself. In creating wealth, your focus should be on using good debt to acquire assets that are expected to hold their value, appreciate, or contribute positively to your future earnings potential.
Creating Wealth in the Current Environment
So how can you create wealth in this challenging economic environment? Well, we recommend that you take time to consider whether your financial priorities are in alignment with your life purpose. The stay-at-home orders have clearly given some of us time to think about what matters most in our lives. It has also forced us to reevaluate the things we can and cannot do without.
Therefore, now may be an opportune time to identify mismatches between your spending and savings habits and your life’s vision and purpose. The easiest way to start is by pulling up your last few bank statements. Then, look for patterns in your spending habits and ask yourself if those patterns align with what’s most important in your life right now. Any misalignment between priorities and purchases may be an opportunity for you to create wealth in your life.
Another thing that you can do to create wealth is to think about how you’re utilizing your talents right now and what you can do to create the most value for your employer or clients. With rising unemployment and business bankruptcies, the current economic environment will undoubtably increase your competition as business leaders and consumers have greater hiring and purchasing power.
Every man, even the most blessed, needs a little more than average luck to survive in this world. –Vance Bourjaily
There is no question that you will need to step up your game if you’re going to compete in the current environment and certainly, take your earnings game to the next level. Therefore, we believe that now is an opportune time to invest in yourself and your business with a goal for increasing your unique value offering. This may include looking at MOOCs or other certification processes to brush up on key skills and firm up your talents if you are a working professional. For business owners, the world has fundamentally changed and so finding ways to pivot your business model to efficiently serve clients in a changed world could help give you a competitive advantage and increase your wealth creation ability.
Figure 3: Building Enduring Wealth Begins with a Process
Finally, another way to create wealth is to put money away in savings and to pay down unproductive debt. If your employer offers a 401(k) or other matching retirement savings accounts, look for ways to max out your contributions. The tax, time and other employer benefits can lead to greater wealth creation (notably as financial asset prices have pulled back from recent highs) than compared to a simple savings account.
Also use this quiet period to evaluate how efficiently the assets you own are either helping or hindering your equity position. More specifically, pull up your credit report and take a look at how much good vs. bad debt are on the books. Before paying off any debt, however, it’s important to note during this time of economic uncertainty that cash and credit can both serve as important financial lifelines. For example, should you experience a loss of income you could tap your savings or line of credit to pay bills or meet immediate financial needs.
Therefore, take the time to evaluate your debt situation carefully. If you have experienced reduced or a loss of income, partner quickly with your lenders to find a way to accommodate your present situation. Otherwise, work on developing a debt payoff plan that produces an appropriate balance between quickly reducing debt while preserving an adequate cash buffer.
Get Started Today
We believe that purpose driven individuals can, over time, build wealth regardless of their current circumstances. This can be done by taking the first step in a disciplined, systematic process to create enduring wealth. The steps that we have outlined are simple. But make no mistake, they are not easy and will require constant discipline and consistency to achieve long-term success. Even so, the sooner you get started the closer you can get to achieving important financial goals and ultimately pursuing your life purpose.
When will they shut the markets?
Global risk assets continued to move lower on Monday, pushing the current selloff well into bear market territory and on pace with a level of volatility not seen since the market crash of 1987. To be sure, the S&P 500 index shed over 12% in another unpredictable day of trading and follows the surprise FOMC meeting on Sunday that slashed the fed funds rate by 100 basis points and saw the restart of its asset purchase programs.
What has become clear to many market participants and investors is that the precautionary measures used to slow the spread of the coronavirus (social distancing) will have broad and deep economic implications that are still not well understood. It can further be argued that today’s market activity reflects a sentiment that policymakers lack the tools to mitigate the economic pain that is likely to arise in the coming months.
Market closures in context
Considering the seeming failure of current policy to support sentiment, some market participants are now asking whether more direct measures can be taken to halt the selloff. More specifically, it has been suggested that financial markets could be shut altogether to help cooler heads prevail.
History, nevertheless, has shown that for more than 100 years, closures have sparingly been used to ease market routs. As illustrated in figure 1, there have been a few events over the past century that have led to market closures for more than a day. Some of those events include Hurricane Sandy, the 9/11 terrorist attacks, a Paperwork Crisis in the 60’s and the start of World War 1.
These periods reflect a handful of events that have occurred alongside numerous epidemics, wars, global recessions and financial crises over the same period. Therefore, what the data suggest is that there is little historical precedent for policymakers to outright halt trading in U.S. securities markets for more than a day at a time. What’s more, even during periods of heightened volatility, markets remained opened and largely in normal functioning order.
Figure 1: Days when the New York Stock Exchange was unexpectedly closed
When will they shut the markets?
An argument could be made that closing the markets for even a week or two could preserve household wealth while giving policymakers time to prepare a robust solution set that would help businesses and households navigate what is likely to be a tumultuous economic landscape in the coming months. Nonetheless, what has become clear to us is that the financial markets today act as an important signaling mechanism to policymakers.
For example, indicating a lack of liquidity and other systemically important market dislocations in the case of the Fed, and a lack of confidence in the currently coronavirus policy response to the White House. To shut the markets entirely, therefore, would mean cutting off the feedback mechanism that has helped guide and refine policy as events surrounding the spread of the coronavirus have unfolded. Besides closing the markets, what else can be done to ease market selling pressures?
To be sure, a number of tools exist today that can help prevent negative market sentiment from completely overwhelming asset prices. The New York Stock Exchange, for example, utilizes circuit breakers that halt trading at three different times throughout the trading day: 15 minutes when the S&P 500 index falls 7% and then again after 13% from its previous day’s close; and a complete halt in trading when prices fall more than 20% during the day.
Another tool used by policymakers to stem a market rout is a ban on short selling. This approach was utilized in 2008 to halt speculative selling pressures in financial stocks. And, this approach is being used today in a number of markets outside of the U.S.
In short, after weeks of policy disappointments, investors are eagerly awaiting some catalyst to quickly stop the bleeding and potentially set the stage for a move higher in the markets. While it’s very well possible that market closures could take place in the weeks ahead, their importance as a signaling mechanism suggest such an outcome would be a last resort among a number of other tools.
What this means is that events like today are likely to remain with us until it is evident that the fight against the coronavirus has reached a turning point. Until then, we provide a number of recommendations that households can take to weather this period of heightened market volatility and uncertainty.
Three quick steps to help manage financial anxieties during uncertain times
If the coronavirus, recession angst or elections are keeping you up at night or have generally increased your level of anxiety, you can take comfort in knowing that what you’re feeling is natural. In fact, our brains are primed for an anxiety response during times of heightened uncertainty. At least that’s according to one research paper published in the journal Nature. And as the researchers point out, higher levels of uncertainty disrupt our ability to assign clear probabilities of success to our desired life plans and goals. When this happens, chemical messengers tend to activate the same centers that control the “fight or flight” response in our brains. The result?
When anxieties build to the point that a fight or flight response is activated, panic can ensue, leading to a set of decisions and actions that may appear irrational in hindsight, yet seeming rational in the moment. From a financial perspective, panicked behavior can include anything from hoarding resources or doubling down on losing bets to selling fundamentally sound investments during a bout of financial market and economic volatility. And while anxiety may build during periods of uncertainty, panic may not be a foregone conclusion during these times. To be sure, the solution may lie in the act of exposure, desensitization and acceptance. So what exactly do we mean here?
Who me, worry?
Well, the idea is that repeated exposure to the things that trouble us the most can, over time, desensitize our brain to our concerns, reduce anxiety and dull our innate panic response and generally increasing one’s ability to constructively deal with highly uncertain events. While this approach is more actively utilized in treating patients with certain phobias like fears of animals or insects, the process can be useful in reducing financial anxieties at a broad level. How so? Well, this can be accomplished by actively embracing the potential for a negative outcome, putting the possible consequence in context and developing tangible action steps to help mitigate their expected negative effects.
Let’s revisit what could go wrong from a financial perspective as a result of the coronavirus outbreak. In brief, we believe that the coronavirus has had both direct and indirect impacts on the global economy that are yet to be determined. Either way, in the most affected parts of the world, like China, the direct effects have been lower consumer spending and business activity resulting from mandatory quarantine and self-isolation on account of the coronavirus. One of the indirect effects of the outbreak has been supply chain disruptions that are making it harder for firms in less affected countries (like the U.S.) to get the products they need to do business.
What this means is that global economic growth is likely to suffer in the coming months as household spending and business activity fall (assuming that a solution to the outbreak is not found soon). While risk assets have in recent days bounced in response to global monetary and proposed fiscal support, the fact is that corporate earnings growth is likely to slow in the months ahead, making assets like stocks more expensive. And as the risk of a U.S. recession rises, we expect economic and financial market volatility to remain elevated for quite some time. So, what can households and investors do to prepare amidst increasing uncertainties?
Figure 1: U.S. recession risks remain elevated
Gain some perspective
For starters, gain some historical perspective and keep an eye on the future. While the coronavirus has not yet been characterized as a pandemic by the World Health Organization (WHO), it could be on track to be more disruptive than the H1N1 virus of 2009. Even so, what’s important to note amidst today’s developments is that in some ways we’ve been here before.
In fact, as a civilization we dealt with a host of health epidemics in the 20th and 21st century, in the last 100 years the global economy has weathered 30 major military conflicts and six global recessions since 1970. During this time, we’ve also witnessed the rise and fall of various political and economic systems and yet, by some measures, global wealth has steadily risen, and poverty levels have fallen. What’s the point?
The point is that despite the concerns surrounding the coronavirus, state of the economy or potentially disruptive nature of elections this year, over the long term economic and financial market conditions are more likely than not to rise in the future. While market volatility and uncertainty can generate uncomfortable feelings in the near term, it is also helpful to remember is that similar events have come and gone over the years. Therefore, revisiting and staying committed to long term goals could help even the most anxious households and investors better navigate near-term uncertainties.
Take action today
Besides gaining some perspective and staying focused on long term goals, what are some tangible actions that households and investors can take to navigate short term economic and financial market volatility? First, build up your cash reserves to help prepare for the unexpected. This includes boosting cash flows by reducing non-essential household spending and lowering interest expenses by refinancing high cost debts. This is important because we expect employment conditions to become less solid should economic uncertainty increase in the months ahead. Therefore, having enough cash on hand to cover 6-12 months of living expenses will be key to bridging disruptive life events.
Next, we recommend investors avoid trying to time the market bottom or, alternatively, selling everything and going to cash. Rather, at this juncture our advice for investors is to keep an attitude toward investing that is rooted in fundamentals and maintaining broad exposure to the markets. This begins with ensuring that portfolio allocations are strategically aligned with long-term goals. And with the market poised to move lower in the near term, we believe that now is the time to look for investment opportunities in solid defensive names, like consumer staple companies, that are positioned to weather periods of sustained market volatility.
Finally, when the economic and market outlook begins to feel out of control, we recommend embracing radical acceptance. That is, accepting life as it is and not resisting what can’t be changed. To be sure, there are arguably more topics of great consequence today creating angst than there has been in years. And while it may be tempting to take a passive posture towards today’s uncertainties, we believe that now more than ever is the time to begin taking proactive steps to preserve long-term goals. This includes educating (exposing) yourself about the potential effects of today’s events, staying rooted in a historical perspective and taking proactive steps to ensure that you can weather near term economic volatility to achieve your long-term goals.
Why the coronavirus is relevant to your finances
It’s getting harder and harder to ignore the potential financial fallout from the novel coronavirus (nCoV-2019) outbreak underway. Some of this fallout was evidenced in the global stock selloff on Friday and futures (as of this writing) point to a weaker start at Monday’s open. Indeed, the concerns surrounding the ongoing spread of nCoV is likely to weigh on market sentiment for weeks. But why is nCoV relevant from a financial perspective?
Well, in our opinion, the quickening spread of the coronavirus illustrates how fast unexpected events can alter near term economic assumptions and upend best laid financial plans, notably at a time when the U.S. economy is primed for a recession. Amidst the potential for outbreak-related market and economic volatility, we provide a few recommendations that households can use to increase their financial preparedness as Wall Street and Main Street worries potentially intensify in the weeks ahead.
It’s going to get worse before it gets better
Coming into the year we expected several key events (like geopolitics, central bank policies and elections) to raise uncertainties and simply make getting ahead in life financially harder for some households in 2020. In last week’s post, we wrote about one strategy investors can use to increase portfolio returns as economic growth falls and market volatility picks up.
We’ll talk about some additional financial strategies that can be used to help mitigate uncertainties later, but before we do that we need to highlight two key reasons why we think the coronavirus is important to consider from a financial perspective.
First, reports on the spread of nCoV and the subsequent global response suggest that the outbreak is likely to get worse before it gets better. While Beijing has stepped up its efforts to quarantine suspected infected zones, other governments, like Russia and Singapore have sealed their borders with China while countries like the U.S. have put up their own restrictions on travel to-and-from China amidst the outbreak.
This comes as the World Health Organization (WHO) declared a “public health emergency of international concern” last week. To be sure, the rapid spread of nCoV compared to other coronaviruses like SARS suggests that the current outbreak has the potential to only get worse before it gets better. Barring a rapid de-escalation of current events, what this likely means is that discretionary international travel is poised to slow in the coming weeks not just into and out of China, but potentially among countries that are seeing infections rise and more importantly as deaths outside of China begin to increase in number as well. This brings us to our second point.
Figure 1: U.S. recession risks are elevated in 2020
U.S. economy primed for a slowdown
The restriction on travel and closing of borders could very well aggravate a downturn in a U.S. economy already primed to slow this year. As we’ve written about in past posts, we believe that the risks related to a U.S. recession remains elevated this year as business spending and hiring activity declines. And while discretionary household spending supported the U.S. economy in 2019, last week’s fourth quarter GDP print remained soft even as the Fed primed its quantitative easing pump during the last three months of the year.
And from this perspective, we expect corporate earnings growth to remain subdued in 2020, challenging already stretched financial valuations. In other words, risky assets have broadly had a strong run in recent months, but now appear expensive on historical basis. And this fact increases the chances that already expensive risky assets could come under increased selling pressure as some sudden shock causes the recent bullish euphoria in the markets to fade. Today, the economic implications of nCoV are only likely to complicate the current market backdrop.
Assuming the uncertainty surrounding nCoV is not reversed quickly, there is a potential that growth in the world’s second largest economy (China) could slow to a rate below current year estimates, contributing to broadly weaker global growth in 2020. This could happen if a further spread of the nCoV outbreak expands quarantine zones and halts economic activity across Chinese provinces as the movement of people and goods grinds to a halt.
What’s more, demand for goods and services globally are likely to fall as people stay home and consume less, impacting exports of goods and services in affected regions and slowing commerce between China and its key trade partners. For the U.S., such uncertainties are likely to only galvanize the willingness of business leaders to postpone discretionary hiring and spending this year. While it is still too soon to tell how the U.S. economy would be affected, the risks related to a U.S. recession are likely to increase in a scenario where global trade declines, business hiring and spending falls and consumers stay home. This leads us to our point about financial preparation.
Coronavirus: how to prepare financially
Without being overly alarmist, we believe that it is important for households to use current events surrounding the novel coronavirus as a reason to take a few steps to ensure financial preparedness as economic and market volatility rise in the coming weeks. This is important because as the economy slows, plentiful jobs may become harder to find when unemployment rises and the ability to borrow money becomes harder as banks tighten lending conditions. So, what steps can households take to increase their financial preparedness?
First, we recommend households look for ways to increase net cash flows. This includes reducing discretionary (or non-essential) spending and finding ways to advantageously use today’s low interest rate environment to refinance high-cost debts. We also suggest maxing out employer-matching retirement savings contributions, putting off big-ticket spending and using excess cash flows to build up emergency savings. We believe that these steps can better prepare households for unexpected life events, particularly as labor market conditions show signs of weakening in the coming months.
Figure 2: Strategies to help financially prepare for the unexpected
Second, for investors oriented towards asset growth, we recommend trimming exposure to higher-beta, lower quality investments and broadly ensuring that aggregate portfolio holdings across all investment accounts reflect long-term goals. While volatility exposes risks in the markets, it is also likely to present opportunities. And this is one reason why we believe that investors should rebalance portfolios, not only to align allocations with long-term goals, but also to generate cash that can be deployed opportunistically as market volatility creates favorable buying prospects.
Finally, for households preparing to take distributions from their investment, we recommend rebalancing accounts to long-term investment objectives and reduce unnecessary risk taking. As we pointed out last week, we investors can increase overall returns (without increasing risks) by trimming unnecessary expenses in their portfolios. Further, we recommend ensuring that cash positions are adequate to meet 6-12 months of living expenses. This is intended to avoid forced selling at depressed prices when market volatility increases.
Cut costs to increase investment returns
Cutting costs may be one of the most effective ways to increase investment returns this year.
To be sure, some investors have been riding a wave of positive market momentum over the past year as lower central bank policy rates have broadly boosted asset prices and seemingly contributed to easy investment returns.
While monetary policy could be supportive of risk assets in 2020, we expect prices to remain susceptible to quick reversals as markets remain near historic highs.
Market Volatility on the Rise
In fact, this was illustrated last week as news of the coronavirus’s global spread caused a pullback in financial markets.
We believe that last week’s market selloff also serves as an important reminder to investors that the momentum that had contributed to easy market gains are likely to be challenged this year by weaker economic fundamentals, softer earnings and already stretched valuations.
In such an environment, we believe that investors have a better chance of increasing their returns by managing fees and managing risks in their investment portfolios.
Addition by Subtraction
So how can managing fees improve investment returns?
Well, simply put, the higher the fees charged to an investment account, the lower the base from which a portfolio can appreciate.
Or put differently, fees tend to reduce the amount of money that can be put to work and compounded over time. To illustrate this point, we compare the performance of two hypothetical portfolios that have varying fee structures.
For example, two portfolios valued at $250,000, each compounding monthly at a hypothetical annual rate of 5%, but with different fee levels.
Annual product fees in Portfolio 1 average 1.0% and have asset management fees of 1.5%. This compares with annual product and asset management fees each of 0.5% for Portfolio 2.
In aggregate, this is 1.5% less than the first portfolio. So how do they compare?
Performance Divergences
Additionally, a notable divergence in the value of Portfolio 2 over its peer across our 10-year test period.
More specifically, the gains attributed to lower product and management fees added up to over $52,000 over the test period and made for a difference of 16.2% between the two portfolios.
This suggests that not only do lower fees contribute to higher compounded returns, they also reduce the amount of time it takes to achieve financial goals.
To this point, we know that it took 10 years for Portfolio 2 to increase from $250,000 to a value of $372,000.
How much longer would it take Portfolio 1 to achieve this value given the same sort of assumptions in our previous example?
At higher fee levels, Portfolio 1 would need to compound at its current rate and fee structure for six additional years to attain the value that Portfolio 2 had achieved in 10 years.
That’s arriving at a financial goal six years sooner and illustrates the rules of exponential growth applied to savings goals.
Ways to Manage and Reduce Investment Fees
So then what steps can investors take to cut costs and increase investment returns in their portfolios?
Well, we suggest that they begin by looking at how much they’re being charged by the products held in their investment portfolios.
We have found that actively managed mutual funds tend to charge higher fees than passively managed exchange traded funds (ETFs).
This is important because active managers have had a track record of underperforming their benchmarks over the past decade. And from this perspective, investors may be better served by paying for indexing than by paying to time the markets.
Evaluate Third Party Fees
Beyond managing product costs, we recommend that investors take a close look at the fees they are paying to their asset managers.
These fees, typically charged on an asset under management (AUM) basis, vary widely among asset management firms and can rise or fall based on the size of an investment portfolio.
Therefore, we recommend comparing your AUM fees against industry averages, and pay particular attention to the breakpoint levels that may qualify you for a lower fee if your portfolio has appreciated in recent years and your AUM fee remains unchanged.
Is There Value Add?
If the fees you are being charged are above average and your asset management firm cannot clearly articulate the value-add of their higher management fee, then we recommend evaluating potential alternatives.
In this increasingly commoditized business, some alternatives would include firms with a lower cost AUM structure or those that charge a flat asset management fee.
Either way, in an environment where market volatility could potentially rise in the months ahead, we believe that investors are best served by managing risk in their investment portfolios.
This is done by rebalancing allocations to their long-term investment objectives.
From the perspective of managing fees and increasing investment returns, the act of addition by subtraction, that is, reducing the amount of money flowing out of a portfolio, we believe can contribute to higher overall portfolio values and reduce the time it takes to grow assets to a target level.
The rise in wealth and a decline in financial security
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Financial conditions have become increasingly complex and uncertain even as the economy and financial markets have gained in recent years.
-
A lack of financial preparedness, fewer savings opportunities for a younger generation and retirement insecurity are just a few reasons why a growing number of people find it harder to get ahead in life financially.
-
Nevertheless, we believe that the development of a customized personal financial playbook can help households navigate coming complexities and uncertainties and ultimately get ahead in life financially.
Increased economic and financial market complexities and uncertainties come at a time when more Americans report that it is simply harder to get ahead in life financially. To be sure, even as the economy has notably expanded over the past decade, more jobs have been created and households possess greater overall wealth, a government report suggests that a large percentage of Americans remain financially fragile[1].
Economic insecurity and financial shocks
To this point, data indicate that many Americans lack the financial resources necessary to weather unexpected life events like a job loss[2]. Indeed, the report finds that more than half the individuals polled in a 2019 survey have less than $1,000 in savings. That’s equivalent to the national monthly average rent for a 1-bedroom apartment and comes at a time when it takes more than 45 days for an unemployed person to find new work.
To be sure, simply weathering an unexpected life transition, like a job loss, is emotionally and financially disruptive for many American households. And when the unexpected does strike for those without an adequate emergency savings plan, as it inevitably does, money held away for retirement or other long-term savings goals are among the first to be tapped, undermining many household’s already underfunded savings and retirement goals.
[1] Consumer Financial Protection Bureau, “Financial Well-Being in America”, September 2017
[2] GoBankingRates, “Survey of Household Saving”, September 2017
Figure 1: Most Americans surveyed have less than $1,000 saved
A lost generation
Other reports suggest that getting started on the right foot has become a financial challenge for a younger generation[3]. Certainly, the data show that the number of adults aged between 25 and 35 living at home with their parents is double the rate it was 50 years ago. What’s more, fewer people in this demographic are participating in the labor market when compared to data from the past two decades.
This comes as recent college graduates report having a harder time finding meaningful, well-paying work and the amount of student loan debt has doubled to over $1.6 trillion in the post-Great Recession era. Adding insult to injury, housing affordability is in decline, making traditional life transitions like purchasing a home more challenging for some would be first-time buyers.
To be sure, falling interest rates have made monthly mortgage payments more affordable on a relative basis. Yet, the absolute rise in home values over the past decade means that first-time homebuyers will need to save more money for a bigger down payment and at the same time service a larger mortgage payment than in years past[4].
[3] Zillow.com, “More Than One in Five Millennials Still Live with Mom”, May 2019
[4] National Association of Realtors, Housing Affordability Index, October 2019
Figure 2: National home prices have surpassed historic levels
And while some fortunate individuals have been able to successfully transition into the job market, more challenges remain, particularly as individuals face many important choices related to balancing cash flows to maintain a certain quality of life today against saving for tomorrow’s life transitions like buying a home, educating a child and preparing for retirement at a time when wage growth has been stagnant.
Growing retirement insecurity
Retirement insecurity is also on the rise as more workers worry about self-funding retirement[5]. This comes as widening fiscal deficits have raised concerns among many savers about whether the U.S. government will have enough money to fund Social Security benefits in the future.
Indeed, a report from the Social Security Trustees shows that the combined value of the Social Security trust funds used to pay retirement and disability insurance will be depleted by 2035 if lawmakers do not act today[6]. Even more troubling, the number of people approaching full retirement age is swelling daily all the while political and economic uncertainties raise market volatility and increasingly jostle balances in self-funded retirement accounts.
To this point, many retirees recall the negative effects that financial market shocks of 2008-2009 had on market-based retirement savings plans. At that time, some would-be retirees lacked a proper retirement distribution strategy as the Great Recession took hold and financial markets responded in kind.
When some financial assets, like stocks, experienced a drawdown of as much as 40%, mistimed withdrawals from retirement plans had a detrimental effect on the longevity of self-funded retirement plans. That is, assets that had lost considerable value in some cases were sold off, locking in paper losses and substantially reducing the size of personal retirement savings. As a result, some people today still find themselves working in their golden years, making up for savings lost during a period of heightened market volatility.
A lack of financial preparedness, fewer savings opportunities for a younger generation and retirement insecurity are just a few reasons why a growing number of people find it harder to get ahead in life financially. And yet for those individuals who have been fortunate enough to overcome these obstacles, increasingly complex challenges await them as current developments suggest the financial environment is likely to become even more complex and uncertain in the coming years.
[5] Transamerica Center for Retirement Studies, “Compendium of Findings About American Workers”, June 2018
[6] Social Security Board of Trustees, “2019 Annual Report of the Board of Trustees of the OASDI Trust Funds”, April 2019
Figure 3: Social security reserves will be depleted by 2035
Nevertheless, we believe that the development of a customized personal financial playbook can help households navigate coming complexities and uncertainties and ultimately get ahead in life financially.
In our next post, we’ll look at some of the factors that are likely to increase financial uncertainties and complexities in the coming year.
This post is an excerpt from our report, Getting Ahead Financially in 2020. You can download this report in its entirety by visiting franklinmadisonadvisors.com.
Important Disclosures
Broadview Macro Research is a division of Franklin Madison Advisors, Inc (“FMA”). The commentary provided on this website is limited to the dissemination of general information pertaining to Franklin Madison Advisors’ investment advisory services and general economic market conditions and are subject to change without notice. The information contained herein is not intended to be personal legal, investment or tax advice or a solicitation to buy or sell any security or engage in a particular investment strategy. For additional information about FMA, including fees and services, please contact FMA or refer to the Investment Adviser public disclosures.
Franklin Madison Advisors, Inc., is registered investment adviser firm with its registration and principal place of business in the Commonwealth of Pennsylvania. Registration of an investment adviser does not imply a certain level of skill or training. FMA is in compliance with the current notice filing requirements imposed upon registered investment advisers by those states in which FMA maintains clients. FMA may only transact business in those states in which it is notice filed or qualifies for an exemption or exclusion from notice filing requirements. Any subsequent, direct communication by FMA with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For additional information about FMA, including fees and services, please contact FMA or refer to the Investment Adviser Public disclosures. Please read the disclosure statement carefully before you invest or send money.
To learn more, visit us at http://www.franklinmadisonadvisors.com
The rise in wealth and a decline in financial security
-
Financial conditions have become increasingly complex and uncertain even as the economy and financial markets have gained in recent years.
-
A lack of financial preparedness, fewer savings opportunities for a younger generation and retirement insecurity are just a few reasons why a growing number of people find it harder to get ahead in life financially.
-
Nevertheless, we believe that the development of a customized personal financial playbook can help households navigate coming complexities and uncertainties and ultimately get ahead in life financially.
Increased economic and financial market complexities and uncertainties come at a time when more Americans report that it is simply harder to get ahead in life financially. To be sure, even as the economy has notably expanded over the past decade, more jobs have been created and households possess greater overall wealth, a government report suggests that a large percentage of Americans remain financially fragile[1].
Economic insecurity and financial shocks
To this point, data indicate that many Americans lack the financial resources necessary to weather unexpected life events like a job loss[2]. Indeed, the report finds that more than half the individuals polled in a 2019 survey have less than $1,000 in savings. That’s equivalent to the national monthly average rent for a 1-bedroom apartment and comes at a time when it takes more than 45 days for an unemployed person to find new work.
To be sure, simply weathering an unexpected life transition, like a job loss, is emotionally and financially disruptive for many American households. And when the unexpected does strike for those without an adequate emergency savings plan, as it inevitably does, money held away for retirement or other long-term savings goals are among the first to be tapped, undermining many household’s already underfunded savings and retirement goals.
[1] Consumer Financial Protection Bureau, “Financial Well-Being in America”, September 2017
[2] GoBankingRates, “Survey of Household Saving”, September 2017
Figure 1: Most Americans surveyed have less than $1,000 saved
A lost generation
Other reports suggest that getting started on the right foot has become a financial challenge for a younger generation[3]. Certainly, the data show that the number of adults aged between 25 and 35 living at home with their parents is double the rate it was 50 years ago. What’s more, fewer people in this demographic are participating in the labor market when compared to data from the past two decades.
This comes as recent college graduates report having a harder time finding meaningful, well-paying work and the amount of student loan debt has doubled to over $1.6 trillion in the post-Great Recession era. Adding insult to injury, housing affordability is in decline, making traditional life transitions like purchasing a home more challenging for some would be first-time buyers.
To be sure, falling interest rates have made monthly mortgage payments more affordable on a relative basis. Yet, the absolute rise in home values over the past decade means that first-time homebuyers will need to save more money for a bigger down payment and at the same time service a larger mortgage payment than in years past[4].
[3] Zillow.com, “More Than One in Five Millennials Still Live with Mom”, May 2019
[4] National Association of Realtors, Housing Affordability Index, October 2019
Figure 2: National home prices have surpassed historic levels
And while some fortunate individuals have been able to successfully transition into the job market, more challenges remain, particularly as individuals face many important choices related to balancing cash flows to maintain a certain quality of life today against saving for tomorrow’s life transitions like buying a home, educating a child and preparing for retirement at a time when wage growth has been stagnant.
Growing retirement insecurity
Retirement insecurity is also on the rise as more workers worry about self-funding retirement[5]. This comes as widening fiscal deficits have raised concerns among many savers about whether the U.S. government will have enough money to fund Social Security benefits in the future.
Indeed, a report from the Social Security Trustees shows that the combined value of the Social Security trust funds used to pay retirement and disability insurance will be depleted by 2035 if lawmakers do not act today[6]. Even more troubling, the number of people approaching full retirement age is swelling daily all the while political and economic uncertainties raise market volatility and increasingly jostle balances in self-funded retirement accounts.
To this point, many retirees recall the negative effects that financial market shocks of 2008-2009 had on market-based retirement savings plans. At that time, some would-be retirees lacked a proper retirement distribution strategy as the Great Recession took hold and financial markets responded in kind.
When some financial assets, like stocks, experienced a drawdown of as much as 40%, mistimed withdrawals from retirement plans had a detrimental effect on the longevity of self-funded retirement plans. That is, assets that had lost considerable value in some cases were sold off, locking in paper losses and substantially reducing the size of personal retirement savings. As a result, some people today still find themselves working in their golden years, making up for savings lost during a period of heightened market volatility.
A lack of financial preparedness, fewer savings opportunities for a younger generation and retirement insecurity are just a few reasons why a growing number of people find it harder to get ahead in life financially. And yet for those individuals who have been fortunate enough to overcome these obstacles, increasingly complex challenges await them as current developments suggest the financial environment is likely to become even more complex and uncertain in the coming years.
[5] Transamerica Center for Retirement Studies, “Compendium of Findings About American Workers”, June 2018
[6] Social Security Board of Trustees, “2019 Annual Report of the Board of Trustees of the OASDI Trust Funds”, April 2019
Figure 3: Social security reserves will be depleted by 2035
Nevertheless, we believe that the development of a customized personal financial playbook can help households navigate coming complexities and uncertainties and ultimately get ahead in life financially.
In our next post, we’ll look at some of the factors that are likely to increase financial uncertainties and complexities in the coming year.
This post is an excerpt from our report, Getting Ahead Financially in 2020. You can download this report in its entirety by visiting franklinmadisonadvisors.com.
Important Disclosures
Broadview Macro Research is a division of Franklin Madison Advisors, Inc (“FMA”). The commentary provided on this website is limited to the dissemination of general information pertaining to Franklin Madison Advisors’ investment advisory services and general economic market conditions and are subject to change without notice. The information contained herein is not intended to be personal legal, investment or tax advice or a solicitation to buy or sell any security or engage in a particular investment strategy. For additional information about FMA, including fees and services, please contact FMA or refer to the Investment Adviser public disclosures.
Franklin Madison Advisors, Inc., is registered investment adviser firm with its registration and principal place of business in the Commonwealth of Pennsylvania. Registration of an investment adviser does not imply a certain level of skill or training. FMA is in compliance with the current notice filing requirements imposed upon registered investment advisers by those states in which FMA maintains clients. FMA may only transact business in those states in which it is notice filed or qualifies for an exemption or exclusion from notice filing requirements. Any subsequent, direct communication by FMA with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For additional information about FMA, including fees and services, please contact FMA or refer to the Investment Adviser Public disclosures. Please read the disclosure statement carefully before you invest or send money.
To learn more, visit us at http://www.franklinmadisonadvisors.com
Adjusting to Seismic Shifts
In the blink of an eye the coronavirus has fundamentally changed our world in more ways than we can imagine. While it seems like an eternity ago, it only has been a matter of days since Pennsylvania Governor Tom Wolf issued his first stay-at-home order for a few counties in the state.
This week, the Governor expanded his order to all counties throughout the Commonwealth and for a period of at least 30 days. In recent weeks, many states have enacted their own stay-at-home measures being it necessary to mitigate the spread of the COVID-19 virus. Unprecedented times call for unprecedented measures.
It is needless to say that from a financial perspective, social distancing and self-isolation have created a seismic shift in the economy, in financial markets and in many people’s personal financial plans. Data this week showed that over 6 million people applied for unemployment benefits adding to last week’s catastrophic 3.2 million initial jobless claims.
Figure 1: A 50-fold increase in jobless claims
And to put this number into perspective, the 4-week average just prior to the virus outbreak was sitting at around 200,000 initial claims. That’s a fifty-fold increase in less than two weeks and at no time in post-war history have we seen so many people lose their jobs in such short order.
And so it goes: most people today know someone that has been fundamentally affected – whether it’s in their physical or mental health, finances or otherwise – by the coronavirus outbreak. Without a doubt the unexpected event has fundamentally changed the plans that nearly every single American has laid out for themselves this year and for years to come.
While a number of measures are underway to mitigate the financial fallout from the pandemic, many households and business owners are still struggling to grasp the gravity of the changes underway. With that said, during this time of change, we believe that the best way to rebound from a financial setback is by setting yourself up with a plan to navigate a world that has just gone through a seismic shift.
Government loosens its purse strings
So, what exactly has the government done to address the economic and financial fallout from social distancing measures? Well, in response to and anticipation of further virus mitigation efforts, the government has taken unprecedent actions to shore up the economy. For instance, on March 27, Congress passed the Coronavirus Aid, Relief, and Economic Security (or CARES) Act. This fiscal stimulus package provides more than $2 trillion in aid to individuals and businesses of all sizes and across the United States.
Such a dollar amount is certainly hard to grasp on its own, but in comparison to past stimulus measures, the CARES package is more than twice the size of the American Recovery and Reinvestment Act passed during the Obama administration back in 2009. In terms of what went into the CARES package, there are a number of items geared to help households and businesses. These measures include:
Figure 2: The government will borrow $2 trillion to support households and businesses
Overall, about a quarter of the money from this package will go directly to households, 40% will go to help businesses and roughly a third of the money will go to state and local governments and health and education institutions.
Fed pulls out all the stops
Now on the monetary side, the Federal Reserve has pulled out all the stops to support the proper functioning of the financial system and carry out its dual mandate of price stability and full employment. Put a different way, the Fed today is doing everything it can to support the financial system (and the economy) like it did back in 2008. In reality, under Jay Powell, the Fed is doing much more than it did a decade ago when Ben Bernanke was at the helm.
To this point, early last year the Fed signaled that it would stop raising interest rates, and pivot away from tightening monetary policy and toward easing as economic growth back then started to show signs of fraying. What’s more, in September, the Federal Reserve restarted its asset purchase program after certain events exposed issues in the Treasury market. At that time, the central bank had begun purchasing assets at a rate of $10-20 billion per month.
In March of this year, the Federal Open Market Committee (FOMC) surprised markets when it cut its target policy rate to around zero percent. What this means is that the Federal Reserve wants interest rates to go back to the same level that they were during the height of the Global Financial Crisis a decade ago.
Figure 3: Fed Assets Up Over $2 Trillion in Less Than 7 Months
Also last month, the Fed committed to purchasing corporate and local government debt, it increased the rate of its asset purchases up to $90 billion per day and committed to adding an unlimited amount of assets to its balance sheet for an indefinite period of time. Taken together, the actions from the Fed signal a willingness to get ahead of what is likely to be a very serious downturn in the U.S. economy.
A “V” shaped recovery not likely in the cards
So how do these measures relate to economic expectations? Well, a national poll released on Friday showed that less than half of respondents surveyed believe that the economy will return to normal by the month of June. What this suggests is that the majority of a sample of the American population do not believe that the economy will recover quickly and that the effects of the coronavirus will linger for longer than many policymakers are communicating to the public.
To be sure, we’ve been writing about the fact that global pandemics historically have come in three waves, each with their own recovery period. And so how does this apply today? Well, not only are we right now dealing with the first phase of the outbreak here in the U.S., there are now signs that the outbreak has returned to Asia where – until recently – many countries had thought they contained the coronavirus.
What this means is that social distancing measures in the U.S. are likely to remain in place for longer than most people expect. This also means that businesses may not reopen as quickly as some people anticipate and it means that more workers will likely remain unemployed for longer.
Figure 4: “V” Shaped Recoveries Tend to be Shorter Than “U” Shaped Recoveries
From this perspective, it’s possible that the U.S. and global economy will experience a prolonged “U” shaped rebound and not a “V” shaped recovery as hoped by many economy watchers. Indeed, this view is held by researchers at PIMCO, a widely known asset management firm, who estimate that stability in economic growth could take as long as 12 months to form.
We believe that the reason it could take longer for the economy to recover is because the virus will take longer to contain. And, until a vaccine or significant level of immunity is developed across the global population, the deadly effects of the virus will continue to hamper economic growth. The result is that many firms will simply not be able to restart operations as quickly as some people had hoped.
Adding insult to injury, we have yet to see whether the current fiscal and monetary support packages will be enough to mitigate a broad swath of corporate bond defaults that are now waiting in the wings. To be clear, there is a group of companies that for years have been sitting on the cusp of bankruptcy, if not for the support of the Fed’s money printing operations.
Figure 5: More than 50% of Investment Grade Debt is One Notch Above Junk
What this means is that, in addition to the COVID-19 related risks, the economy and financial markets could get yet another shock from a backlog of ailing companies now filing for bankruptcy protection. In such a scenario, it’s hard for us to see how household spending and business investment could rebound in short order without a sudden drop in new coronavirus cases globally.
"Nimble thought can jump both sea and land."
William Shakespeare
Setting up for a rebound
In terms of how we should be relating to these financially important events, it’s our belief that people should look for the silver linings whenever possible. Without a doubt the spread of the coronavirus has derailed life and financial plans for many people. While the devastation is unique and personal to each one of us, it is also worth noting that the current events provide a unique opportunity to stop and reassess. That is, to take a hard look at what’s really important in each one of our lives.
Illness has a way of naturally slowing us down and forcing us to reevaluate our current life priorities. Sometimes we get so fixated on a goal, or an outcome in our lives, that we lose sight of the really important things that are going on around us. And from a financial perspective, what may have been a priority or an important goal just a few weeks ago may no longer matter as much in light of the current circumstance. In other ways, the current developments may have taken away people and opportunities that have left us feeling lost and disorientated.
“…in life it doesn’t matter what happened to you or where you came from. It matters what you do with what happens and what you’ve been given.”
Ryan Holiday
In his book, “The Obstacle is the Way”, author Ryan Holiday tells us that, “…in life it doesn’t matter what happened to you or where you came from. It matters what you do with what happens and what you’ve been given.” From this perspective, we believe that the best way to rebound from a financial setback is by setting yourself up with a plan to navigate a world that has just gone through a seismic shift.
A Dutch proverb tells us that “he who is outside his door already has a hard part of his journey behind him.” Therefore, whatever the case may be regarding our financial circumstances, one of the most important things that we can do in the coming weeks and months is to simply do something about our financial circumstances.
This can begin by simply reprioritizing expenses to shore up emergency cash reserves to holistically reevaluating financial priorities, taking stock of resources and developing a plan to align financial resources with a new set of life goals. Whatever the case may be, we believe that one key to getting ahead in life financially in the coming weeks, months and years is to take action today.