Finances: keeping afloat during a black swan event

Financial experts’ tips on surviving the current crisis

Red down arrow and NYSe on the background symbolizing the fall of the stock markets

By Amy Wolff Sorter
In finance and investing, a “black swan event” is defined as one that isn’t expected, hasn’t been predicted and which can have severe consequences when it occurs. Such events are dubbed “black swans,” because much like the darkly feathered birds, they are rare.
The current COVID-19 outbreak checks all of the boxes pertaining to a black swan event, especially when it comes to financial markets and investments. Panic buying, quarantines and toilet-paper hoarding, combined with wildly gyrating stocks and bonds markets, along with the recent oil dislocations, are causing investors to cast nervous eyes at their portfolios.
The advice of local financial experts to the investors? Don’t panic, stay the course, and keep an eye on expenses.
The Dallas-based experts, all of whom are financial planners and have at least two decades of experience in the field, also acknowledged that not panicking can be difficult in the current situation, which came about very quickly, with little or no warning.
“The economy was moving along pretty well, and we were in good shape, then the virus hit,” said Irv Munn, CPA, CFP® and president of Munn & Morris Financial Advisors, Inc.
Scott R. Cohen, CFP, CFS, CAP is affiliated with Kestra Financial and the founder and CEO of CD Wealth Management. He added, “This is a virus-driven recession; a virus-driven pullback.”
Munn said that the result of the coronavirus outbreak has stressed the equity and bond markets. As such, “the severity of this downturn will be more predicated on how people and markets react,” he commented.
But, taking a couple of steps back, the current situation actually isn’t too different from previous downturns. Steven Gundy, founder and managing partner of GS Wealth Management in Dallas, explained that economic expansions, including the one following the 2007-2009 recession, tend to be steady. On the other hand, economic contractions can occur quickly, “like an elevator in free fall, with the cable snapped,” he said, adding that, while the current contraction might feel different from previous ones, most downturns are, for the most part, similar.
Until that cable is mended, and the elevator begins its upward ride — and until the black swan sails into the sunset — the first step for investors is to delve into expenses. Not all households have the recommended emergency funds recommended by experts, to cover three to 12-months’ worth of living expenses during a downturn. But most can reduce spending. “Look at your discretionary budget, and see what you can eliminate,” Cohen advised. “Many of our clients have put austerity measures into place, to cut spending.” By the same token, he said, many are also continuing to fund charities and support local restaurants by purchasing takeout food.
Gundy, meanwhile, is advising his clients to “lean into volatility” — in other words, take an opportunistic approach to investing. This “buy-low, sell high” strategy if executed correctly (and with help from an experienced financial planner or broker), can work well. Munn agreed, noting that, if people have enough protection — specifically, investments above and beyond their reserves — the downturn could be a good time to increase equity spending; again, with the advice of a professional.
And, the three suggested continued investment in 401(k) accounts, at least, as long as households aren’t in financial distress. Munn pointed out that, during the 2007-2009 financial crisis, people stopped investing in 401(k)s and similar plans. When the market recovered, their portfolios were slower to bounce back. “People that can, should stay invested and continue to contribute,” Munn said. “When things start to rebound, and we start to recover, those portfolios can recover more quickly.”
Cohen, Gundy and Munn also agreed that selling out for cash isn’t a good idea either, unless that cash is absolutely necessary for living expenses. The three provided examples of clients who, during the Great Recession, panicked and liquidated their positions for cash. These clients later regretted their actions, as they reentered the market well after the downturn, causing a loss of portfolio value. “This (downturn) won’t last forever,” Munn said. “You want to be in a solid position, as an investor, when the rebound takes place.”
Finally, Gundy suggested that investors measure progress in terms of overall goals, versus short-term fluctuations or portfolio peak values.
“The most advantageous time to make changes is when the economy is good. It can be riskier to make changes in the midst of a financial downturn,” Cohen added.
Watch spending. Understand expenses. Consult certified financial planners. Don’t make panic decisions. Stick to your financial plan. And, if possible, stay the current investment course. This advice can help investors hang on during the rough waters created by a black swan event, and help them emerge stronger as the economy rebounds. Ultimately, Gundy said, the focus is not so much on what is being bought or sold, but the decisions that people are making. “You can either hold tight and be calm, or knee-jerk your way out,” he said.
Furthermore, “not reacting to the reaction can prove to be helpful, in the long run,” Cohen said.
Note: The above was written for general purposes only. TJP advises readers to consult their own experts before making financial decisions.

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