Wealth Management in the Covid-19 Era

Wealth Management in the Covid-19 Era

Amid the Covid-19 pandemic, investors have a host of wealth management options that make sense for the short and long term.

Throughout the decade-long bull market, many people could “manage” retirement funds by simply putting money into an index fund and forgetting about it. But the bull market is over.

Instead of providing reliable returns, the stock market has become volatile terrain, as the economy cratered in response to the Covid-19 virus. Interest rates aren’t much above zero, which means that many bonds are not particularly attractive investments—sticking money in a mattress may not offer any returns, but these days that’s only slightly less than 10-year treasury bonds.

Warren Buffett is often hailed as the greatest investor in the modern era. But Buffett’s Berkshire Hathaway Inc. reported a net loss of $49.75 billion for the first quarter of 2020. The company reported losing $55.6 billion on investments and derivatives, offset slightly by operating earnings from companies the conglomerate owns.

If Buffett is losing billions, where does that leave the average investor? How can you steer your wealth management plans in times like this? In the first quarter of 2020, the S&P 500 dropped 20 percent. April, however, brought a rebound, with the index up 12.7 percent for the month. It was up another 4.5 percent in May.

“That volatility is pretty jarring for everybody,” says Sharon Olson, president of Bloomington-based Olson Wealth Group. “Even the most seasoned investors hadn’t seen anything like this before.”

The age-old advice of financial planners during times of tumult is always the same: Sit tight. Stick to your plan. Don’t panic-sell. Stay focused on the long term.

“When we say that, people hear ‘Don’t do anything,’ ” Olson says. “Our thought is there’s a big difference between ‘Don’t panic-sell’ and ‘Do nothing.’ It’s really more about what can be done.”

Downside protection portfolios

For starters, Olson says many clients are surprised to find that their portfolios aren’t in the kind of dire shape they had imagined. “It’s not as off-track as you might think,” Olson says. “That’s something that has been eye-opening for people.”

Olson notes that her firm works with clients to build portfolios that already have some “downside protection” in the mix.

“We talk about managing the emotional side of investing,” says Olson, who notes that there can be two sides to that coin—blindly optimistic or hopelessly pessimistic. “Last year we had many clients who would say, ‘Oh, do you think I’m being too conservative? Now that the markets are doing so well, maybe I should change my allocation and become more aggressive.’ ”

In retrospect, that would not have been a great idea.

“Just this whole experience has asked us to pivot in our lives, and I think it does change the way we think about, for example, the way we spend,” Olson says; people tend to spend more freely when economic times are good.

Yet the current market has also created some opportunities. For example, it’s a good time to convert a traditional IRA to a Roth IRA.

“When the value of your IRA is down and you’re converting it to Roth, which means you’re exposing it to tax, you have a smaller value that you have to pay tax on,” Olson says.

Thanks to the federal CARES Act stimulus/relief package, Olson says, people who might need cash in the short term can take a loan from their IRAs; they can borrow up to $100,000 and have three years to pay it back, but it has to be Covid-related, she says.

“The other option we have is a collateral loan. Basically, it’s a loan that you can take against a non-retirement account using your assets as collateral,” Olson says. These loans are meant to be short-term bridge loans. “It’s a way for you to get the liquidity that you need without having to sell an equity with a deep discount.”

Read more from this issue

Despite the current uncertainty, Olson remains bullish over the long haul.

“We don’t look at this as a permanent downturn in the market. We’ve found that this is a great opportunity for stock picking, probably the best opportunity we’ve had in a very long time,” Olson says. “With the selloff, with the panic-selling, people sold everything. Along with those sales were some really good companies.” Now her firm is very involved in active management of accounts. 

But while advisors are upbeat about long-term prospects, the economy won’t immediately snap back.

“Our take is it’s going to take a while to rebuild employment and consumption behavior from consumers,” says Mark Simenstad, chief investment strategist at Minneapolis-based Thrivent. “We look at this environment relative to what happened in the great financial crisis of 2008-2009.” He expects market volatility could persist for as long as two years.

He adds that interest rates won’t be moving any time soon. “Expect lower for longer,” Simenstad says. “It could be quite a while longer.”

But as bumpy as the economic outlook might be, most investors don’t need a complete overhaul of their planning.

Rebalance investments now

“We always start with the age-old wisdom of rebalancing,” says Patrick Egan, director of financial guidance at Thrivent. “Our advice might be to rebalance, and that’s selling the relative winners—bonds and cash in this environment—and buying some of the losers in this environment, which have been equities just because they have a higher risk-reward profile.”

Buying opportunities include international and emerging market stocks, he notes, which are less expensive relative to domestic stocks.

Simenstad says that many investors could benefit from taking a wider view of possible investments.

“Sometimes individual investors do not have a broad enough array of asset classes,” Simenstad says. “I think sometimes individual investors think too black and white: U.S. bonds versus U.S. stocks. People should be encouraged [to] expand their opportunity set because therein you also get the benefit of broader diversification.”

Simenstad says that other options include income-generating preferred stock and convertible bonds as well as emerging markets equities. He adds that investors could look at high-yield corporate bonds and municipal bonds as well.

While some might regard dividend-paying stocks as an investment plan of yesteryear, Simenstad says they shouldn’t necessarily be overlooked.

“It’s a very legitimate strategy, particularly for retirees or people who are looking to build an income stream,” Simenstad says. “Right now, bank stocks yield about 4 to 5 percent. That’s vastly better than a lot of bonds right now. You can build income with equities.”

Simenstad adds that there can even be an upside to losses if investors can “harvest” the tax losses.

“You can sell something, take a loss, and then invest in a similar but not identical security type,” Simenstad says. “That can be very attractive to reduce your tax bill. That can be an effective strategy tied in with your rebalancing.”

Financial advisors see multiple opportunities in the volatile market, even though the economy is weak.

Forgo minimum distributions

Something else to consider: The federal CARES Act included a provision that allows taking a “holiday” this year from required minimum distribution guidelines for IRAs and 401(k) accounts. Egan says if you don’t need the money immediately, it makes more sense to let it sit in 2020.

“For people who don’t need the required minimum distribution, retirees who don’t need that to operate their retirement income plan, they can leave those assets in this year—avoid taxes on those assets first and foremost, but secondly allow the market to potentially recover,” Egan says.

Ultimately, he adds, most investors will be fine in the long haul with a few tactical tweaks to their retirement planning. “People do have to make tougher choices in this environment,” Egan says. “But if you have a well-crafted long-term plan, typically these are just slight adjustments to keep you on track.”

For the financial planners of the world, the glass is usually half full.

“Once you get past the initial shock of it, you start to uncover some opportunities to revisit positions, revisit some plans, and then take advantage of the market environment that you’re in,” says Morgan Truscott, head of investments at J.P. Morgan Private Bank in Minneapolis. “Volatility is normal; don’t let it derail your plans.”

Truscott says that estate planning is a key part of wealth management strategies.

“The current environment has provided an opportunity for those that have sufficient wealth to take advantage of several wealth-transfer strategies, given the combination of low interest rates and depressed asset value,” Truscott says. “That could range from low rates on intra-family loans, grantor-retained annuity trusts, or even more simply outright gifts to utilize your lifetime exemption. There are a lot of things you could be doing on the planning side.”

And despite the market tumult, Truscott says that many of the underlying fundamentals haven’t changed.

“Markets have moved a lot over the last few months, and as a result we do have different expectations going forward; however, the relative return expectations in our view haven’t really changed that much,” Truscott says. “We expect private equity is going to be the highest-returning asset class. We expect cash and government bonds should be able to keep up with inflation, even though we expect inflation to be quite low. We expect publicly traded stocks to be somewhere between the two of those.”

Private equity investing is only open to accredited investors who meet certain levels of income or net worth. Another issue with this kind of investing is that private equity investors can’t get their money whenever they want; that typically happens only when companies are sold or go public.

“Private equity comes with its own set of risks, including illiquidity,” Truscott says. “We continue to believe that investors can earn or should expect to earn a premium for that illiquidity.”

Another avenue to consider: ESG investing. ESG is short for “environmental, social, and governance” criteria for socially conscious investors. Truscott says that ESG is drawing increased mainstream attention.

“The crisis may be the making of ESG investing. There’s growing evidence that’s suggesting that ESG-focused funds have outperformed during the Covid-19 bear market,” Truscott says. “It’s been a growing area of focus within the investment community. As an asset class, we think ESG continues to grow.”

The backdrop remains an environment where interest rates remain near historic lows.

“Certainly rates are low, and we think that’s indicative of the future. We foresee a world where rates remain fairly low,” Truscott says. “As a result, the planning aspect of wealth management becomes so much more important.”

Q&A with Ameriprise private wealth advisor Matt Tuttle

Matt Tuttle
Matt Tuttle

Minneapolis-based Ameriprise Financial Inc. is a Fortune 500 financial services and wealth management firm. For 2019 the company reported revenue of $13 billion; half of that is drawn from wealth management services. Ameriprise private wealth advisor Matt Tuttle, who works in the Edina office, took time to answer a few questions about financial planning in the age of Covid-19.

Q: Financial planners typically advise clients not to panic when markets take a notable dip. Is market volatility due to Covid-19 any different?

We are treating the current market volatility with the same approach as we have used in past bear markets. We advise clients to stay the course and remain calm with their investments. In each client interaction, we use fact-based data from past bear markets to help clients understand the risk that comes with attempting to time the market. We strongly encourage clients to stay the course with their investment portfolio because it is tailored to their financial goals, risk tolerance, and time frame. We also look for opportunities during market volatility, which include buying stocks at a lower price, refinancing debt at a lower rate, and taking advantage of the benefits provided by the CARES Act.

Q: Should older investors expect that they may have to work a little longer in light of Covid-19 losses?

Some pre-retirees will have to work longer and some won’t; it all depends on their own financial situation and how prepared they are for their own retirement goal. Since the market dropped in February and March, we have been pleased to see how many pre-retiree clients of ours are still on track for their financial independence goals. We run retirement projections for each client, and a large number of the projections in the past 45 days have still shown 100 percent goal coverage, even with the market pullback, which says a lot for the client’s long-term preparation for their retirement goal.

With that said, the recent market volatility will definitely adjust plans for many pre-retirees, and the adjustments could come in many forms, including retirees spending less, retirees taking Social Security earlier, retirees finding part-time work for supplemental income, and pre-retirees working longer to save more. The uncertainty of the current bear market causes many investors to wonder if they should work longer or change their plan, especially in the middle of a stock market pullback.

Q: What is your short-term and long-term read on the markets for bonds? Equities? Commercial real estate investments? Other types of investments?

Since 1950, the S&P 500 has experienced eight other bear markets (this bear market is the ninth since 1950), and the stock market has rebounded each time, setting a new high from the previous high set before the bear market. Although the Covid-19 health crisis is causing plenty of uncertainty, we strongly believe that the long-term outlook for the market is positive. Investors who stay the course, continue to save, stay diversified, and stay calm are likely to weather the storm. Investors who panic and attempt to time the market may deal with unfortunate consequences.

Burl Gilyard is TCB’s senior writer.

This story appears in the June/July 2020 issue with the title “Intelligent & Calibrated Investing.”