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April 10, 2020

Financial Considerations During a Pandemic

Financial Considerations During a Pandemic

A falling stock market, a potential economic downturn and a lack of clear answers about when things will return to “normal” may have you wondering what to do with your investments. 

In this webinar you’ll learn about:

  • Current market movements and their impact on long-term financial goals
  • What to do with your existing 401(k) plans
  • Preparing for potential defaults
  • Valuation, investment and funding issues

Below is a transcript of the webinar.

Amanda: Just so you guys know, this is put together today by Premier Lifestyle Services, which is a division of Smolin. For your panelists today, we have the moderator Henry Rinder. Henry is a licensed Certified Public Accountant in New Jersey and New York, with more than 30 years of public-accounting experience. He serves his clients in the construction distribution, manufacturing and legal services industries. Henry is a member of the American Institute of Certified Public Accountants, the New Jersey of Certified Public Accountants, the Association of Certified Fraud Examiners, and is also a diplomat of the American Board of Forensic Accountants.

We also have Ted Byer. Ted is a licensed Certified Public Accountant in New Jersey with over 30 years of experience in public accounting and tax. He counsels high-net-worth individuals on wealth management and entrepreneurial issues, and also directs our Premier Lifestyle Services company that provides accounting, tax, and concierge services such as household payroll, cash management, and bill payment. Ted has also been recognized as the top CPA of the year by the International Association of Top Professionals in 2018 for his outstanding leadership and commitment to the industry.

We also have with us today, James DiNardo. Jim is a Wealth Management Advisor with Northwestern Mutual Wealth Management Company and a member of Pioneer Financial. He is an insurance agent with Northwestern Mutual and a registered representative of Northwestern Mutual Investment Services, maintaining Securities Series 7, 63, and 66 registrations, and his Life, Accident, and Health Insurance License.

Henry Rinder: Thank you, Amanda. This was a very nice introduction. Good job. I know we're facing this pandemic and it's a sad time for a lot of people, a lot of families. Our thoughts are with those families and the medical providers who are on the frontline of the first response. It's a concerning situation for all of us. We all try to do our share of help in whatever profession and skills we have.

So today, I'm really privileged to be on a panel with my partner, Ted and our affiliated member of the panel, Jim DiNardo, who are just exceptional professionals, both of them. Ted runs our concierge service type of operation for a lot of high-net-worth clients and celebrities. Jim, as I remember being described as the go-to guy for the hedge fund managers, money managers, and so on. So we assembled a panel for you to answer the hard questions with skill, knowledge, education, and experience, bar none.

So perhaps we can go to the first slide and Ted, if you could give us some quick insight on overall kind of input from clients as to what they see today's financial situation and investment concerns and opportunities. I'll turn over to you, Ted.

Ted Byer: Well, thank you Henry. Investing by its very nature a lot of times is very emotional. We've been on the optimism-to-euphoria side of the graph for quite a while. Certainly the last few years we've seen the stock market hit new highs almost on a regular basis. Everything's been great. My little adage is throw a dart at the Wall Street Journal, buy that stock, and chances are you'll make them money. But not so much the past month or so. The angle that you see in this graph, it's actually much more acute right now. We've gone from euphoria down to desperation and panic, really very, very quickly. What I hear from my clients and financial advisors is that part of our job has to be to counsel that emotional investor.

So what happens when you're emotional, you inevitably buy high and sell low. You get nervous during that panic stage. You feel that the markets going to keep going down, down, down, you need to sell. Obviously you're selling at the low point. Then once everything is back together again, and we're all out socializing and having parties, you hear all kinds of stock tips and obviously you're buying at the high side of the market.

So part of our job, I'm sure Jim will tell you that it's his job too, is to counsel our clients. This will pass. The markets will come back. If anything, we have a great buying opportunity right now. So we try to take the emotion out of it. I look at it as business people and professionals. Jim, do you have anything you'd like to add?

Jim DiNardo: Yeah, absolutely. Control the controllables when you're in the right hand slide, the right hand portion of this slide. Control the controllables, right? So the biggest thing that we're telling clients that is controllable during this time is update, review. Update, and review the financial plan. Yes, the financial plan is less ... well, is not as funded as well as it was January 1st of this year, because the asset base is down. But during the time of anxiety, concern, review the financial plan.

We say that all the time, before we get into, "Hey, what do you think about this market?" I want to bring back what do you think about your financial plan? What variables have changed? Are you thinking of working less because of what's going on? We have had those clients say, "Hey, I'm 60. I thought about going to 65 and I think I'm going to pass. Let me know what we can expect from the asset base and the financial plan at 60."

Conversely, the other thing happens, clients have said, "I think I'm going to work a little bit longer. I want to get through the next bull cycle. I've gone through three bear cycles now, or four bear cycles," if you started '87, before. "I want to live through one more. I've seen what happens in these bear markets if I just sit tight." And we eventually move this slide from the right hand side, back over to optimism, excitement, thrill, and euphoria.

Henry Rinder: So Jim, you're right on point because I've been listening to you and I give you full credit for this. I've been listening to you for several years now. Based on your input, I have diversified my portfolio and I'll be honest, I have not looked at the value of my portfolio in the current circumstance. I don't even want to look, because I know I'm well diversified. I know I'm just going to hold and wait it out. The positions I have, they're going to come. So having said that, and giving you the credit for it, can you please explain this graph that we just displayed?

Jim DiNardo: Sure. So this graph looks at the S&P 500 and where the S&P 500 finishes at the end of the year, as well as where the S&P 500, what was the largest draw down intra year? So one is finishing the year, one is intra year. Okay. So if you take a look at 2008, the worst time that the S&P ... the worst mark in 2008 was down 49%. but it finished the year down 39%. Last year, during the euphoria of 2019, S&P finished up 29%. But there was a time that we were down seven for the year. What this says is that there has been an average of an intra year down 13%. Yet the S&P has finished in annual, with positive returns, 30 out of the 40 years. What that's saying is that we have to be willing to, handle bear, tolerate the intra-year draw downs, to have the positive returns. Again, I go back to, you'll hear me say this a lot in this phone call, the intra-year draw downs, when they look painful, and in 2018, we had an intra-year draw down. 2018, not that far away, of down 20%. We ended the year down 6%. Most of us don't remember the pain of that because the pain of that came during the holiday season, at the end of December. But during these intra-year draw downs, try not to look, let diversification win, and pay attention to the financial plan. There's a slide in here that I'll get into that more.

So again, we don't think that advisors or clients can market time and we're telling you that right off the bat. So if you can't market time, there are two slides in here that I want to talk about here. This slide says, and this includes the ugly month of March of 2020. It goes back 20 years. All the way to the far left, if you just stayed invested, your total return was 4.5%. Again, this is again using the S&P 500, the actual return's a little higher if you use a diversified portfolio. We'll get into that in a sec.

If you missed the 10 best trading days, which the 10 best trading days typically come very close to the 10 worst trading days. So you've got to tie in, and especially in the month of March, where we've had a down double-digit single day and an up double-digit single day within a five day time period. If you miss the 10 best trading days to the second bar on the left, your return goes from 4.5% to 0.66. You just got to stay invested. This is the saying, "It matters more that it is time in the market versus timing the market."

Henry Rinder: And that's the lesson I got from you, Jim. I hope that ... obviously I believe it wholeheartedly, that that's the way you should do it and that's the way we should play the market, exactly the way you're describing: fully invested, stay in. But let's go to the next slide. Maybe we should ... so considering all this, Ted, what are your thoughts on what should clients do?

Ted Byer: I fully agree with what Jim just said. Stay fully invested. I have had hours of conversations with many clients who want to get into cash, want to get into cash. And I'm like, "Fine then. You better get into cash. How are you going to know when to put it back in the market? When it's already rebounded? What day are you going to put it into cash? On the worst day when we're down 10, 12% in a day?"

You just got to stay in there. It's a marathon. It's not a sprint. Investing is a long-term goal and project. You just have to stay invested and you have to follow the financial plan, as Jim says, and you also have to look for opportunities. With the market down this low, there are tons of opportunities out there. So just ride it out.

Henry Rinder: Good point. Anything to add, Jim?

Jim DiNardo: It's already been said, Ted said it already. A statement we're saying a lot with clients, "This will pass." The reason why this is so concerning right now, I read somewhere, "Give me bad news. Give me bad news over uncertainty, any day of the week." I wasn't smart enough to come up with that, unfortunately, I wish I was. But give me bad news versus uncertainty. Right now we have uncertainty. But here's a little bit of the difference in how people are responding to this uncertainty. 

Perfect. This recession that we're in, and we're in one, this recession, there is a similar playbook to all recessions. Our playbook is follow the financial plan. Our playbook is stay diversified. Our playbook is have a rebalancing strategy. Have a rebalancing strategy. As long as the market doesn't go to zero, which we don't think COVID-19 is going to take the market to zero, then this will rebound. This slide is here to explain. So that's a similar playbook on all recessions. The 2000, the 2008, 1987, all recessions work the same way. Have a financial plan, practice diversification, and have a strategy to rebalance. Rebalance essentially means buy when things sell off.

What's different about this recession that we're in is that we've had a $2.4 trillion package put out there already to stimulate the economy, a relief package. How is that different than '08? '08, the powers that be, they were late. Once they got some stimulus to the table through TARP and the other bills, they did a wonderful, wonderful job. But they were late. In a perfect world, staying apolitical, in a perfect world you don't really want Bear Stearns or Lehman brothers to go under. This time around, the powers that be have put $2.4 trillion out there ahead of COVID-19 going away. The reason I bring this up is once COVID-19 goes away, Springtime, Fall, we have a vaccine. I got to stay optimistic on all of those things. I've been stuck in my basement for four weeks so I have to stay optimistic that COVID-19 is going to let me out again. Once that goes away, the only difference to this recession is that there is a relief package that should push this economy up.

So the worst thing that you could do in our opinion with the market is actually get out. We do believe the recovery is going to be fast. We just don't know when. We don't know if it's going to be V-shaped, U, W. I'm not here to tell you I do know. But once the recovery happens, because of how much gasoline has been put out there towards the market, it's going to happen pretty fast. So I'd just encourage people to stay invested. That as a major difference between this recession and the 2008 recession.

Henry Rinder: Let's go back a few slides to the behavioral biases. There you go.

I think I would like you to address this, because obviously we're all saying the same thing. We are saying that people should follow the original strategy and not deviate from it and don't panic, basically. That's what I'm hearing from both of you. On top of it, the good news is, and if there is good news, is that there's $2.4 trillion that's going to flat, on the fiscal-policy side, the market. This is in addition, you haven't even mentioned the monetary policies that are favorable as well at the same time.

Jim DiNardo: Correct.

Henry Rinder: The interest rate cuts and the purchases that the Treasury is making and the Federal Reserve, improving its balance sheet, improving American balance sheet, and taking on paper on the Federal Reserve side. So, anyway, Ted, can you address perhaps people that take the wrong direction, because I'm sure you see some of that. You've mentioned it already and addressed that a bit.

Ted Byer: Sure. I'd be happy to. As the slide shows, there's three times as much pain from a loss as there is for my pleasure from a gain. So human nature, again, we're talking about emotion, is to shield yourself from pain. So if the market's going down and I have three times as much pain on the downside as I did pleasure from the upside, it's very easy for me to eliminate that pain. I get into cash. I sell everything and go into cash. I put it into the bank. If I'm lucky, I earn a percent on it.

Then someday when the market is good, again, I'll take the cash out. I'll put it back into the market. I will have missed, as the slide that Jim showed earlier, the 10 or 20 best days. But I'll ride it up a little bit and I'll get some minor pleasures. As I said, and it does bear repeating, that part of what Jim and I do is coaching and almost playing a psychiatrist in that we have to talk our clients through this pain and try to tell them that it's just the temporary pain. So the doctor used to say when you were little and gave you a shot, "It only hurts for a second." The pleasure will be back. Just be patient.

Henry Rinder: Let's go onto the next slide and talk about diversification, finance professional versus client perception.

Jim DiNardo: So the reason I like this slide is that I've lived this slide. I absolutely have lived this slide. So 2000 to 2002, S&P 500, the total return is down 37%. That was led by technology. We'll talk a little bit about what we think is going to lead this market back as well. But that's the Internet bust, the Internet bubble with the exclamation point of 9/11. By the way, again, that uncertainty comment I made before, 9/11, we didn't know if we were going to be in a permanent being-attacked mode, terrorist mood. That's why that was the scariest time at that time, because there was so much uncertainty. But the S&P 500's down 37% during that time period and a diversified portfolio down 14%. As this slide says, the client said, "Hey, you were down less than the S&P 500, but we still lost money." The client's not happy.

Lo and behold, by the way, 2000 the Internet bubble, the day that the triple-Qs, fun little factoid, the day that the NASDAQ Index hit its high was also the day that Berkshire Hathaway hit its low, same exact day. Talk about diversification. If we had half in Berkshire Hathaway, half in NASDAQ when they reversed, NASDAQ comes down, Berkshire Hathaway goes up, value versus growth at work, diversification works. But the client wasn't all that happy because we were still down 14%. 2003 to '07, S&P 500 is up 82%, diversified portfolio is up 57%. You're saying, "Okay we haven't done as well as the S&P 500," And you're not that happy.

Henry Rinder: Ted, if we can go back a few slides, there was a slide that we passed. It was a slide that had a caption talking about think long term, Building Wealth Takes Time. You can address that.

Ted Byer: Yep. Sure. Again, as I said early on, I think that it's a marathon, not a sprint. The stock market investing as a whole, it's a roller coaster. If you picture a rollercoaster, you start out, you go up, up, up, very high. Then the dips are little dips to keep the momentum going. Because once you get to that peak, the motor's off and you're just coasting along. I mean, you can see from this slide that if you have a one year timeframe, and this is going from 1951 to the end of 2019, any one year that you looked at, it was up 74% of the time and it was down 26% of the time. As you continue on, at 5 years, it's 82 versus 18, at 10 years, 91 versus 9. But at 20 years, any 20 year period from 1951 to 2019, you made money 100% of the time.

So that's why, I mean, I certainly tell my children and my younger clients and my older clients who have children and grandchildren, start young, be disciplined. You will, over the long horizon, come out ahead. I only wish I could tell my 20 year old self to have done that 40 years ago. But certainly it makes sense. Don't invest for the short period of time. Don't make irrational decisions based upon temporary blips.

One of the things I hear a lot, "We've never had anything like this before." Well, look at all the things that we've never had before.

World Wars. We never had world Wars before. We never had 9/11 before. I mean, we could think of on and on through history, all those things we've never had before. Yet, any 20 year period, we made money. This will be no different.

Henry Rinder: Amanda, can you go back to diversification?

Jim DiNardo: Thank you. So I was in the '03, '07, where we've underperformed the S&P. Then '08, down 37, diversified portfolio down 21. We come back to, "Hey, you still lost money." Then finally, '09 to 2019, S&P up 351%. So think about that. If you stayed invested during the worst financial crisis up until now, if you just stayed invested, you were up 351%. Diversified portfolio, because it has fixed income and other asset classes, only up 200%.

Then lo and behold, then you look at this diversified portfolio at the bottom, and it takes 20 years to get a smile from a client sometimes. You're up 197% in the S&P and yet you're up 206 in the diversified portfolio. What the slide doesn't capture is that the diversified portfolio takes about 20% less risk than the S&P 500. So again, the three tenets, the financial plan, diversification and rebalance are key.

Henry Rinder: Excellent points. It actually underlines what Ted was discussing before you jumped back on, which is that investing is a longterm proposition. We all should be looking at it from that perspective. Investing is not speculative trades on day-to-day basis. Can we go to the next slide?

Jim DiNardo: Real quick, one last thing that I just want to hammer home before we wrap up. The investing and the portfolio is a tool to fuel the financial plan. So we've got to separate those two. The financial plan is what you should be paying attention to. Investing is literally a tool because we can't sit in 1% taxable money markets for the rest of our lives. So I just want to hammer that one point home.

Henry Rinder: Good point. Frankly, the next slide would give you that opportunity as well. So let's go to the next slide. There you go. So, which one of you gentlemen would like to take this slide?

Ted Byer: I'll be happy to at least get started. Basically, what this is saying is that the average investor is underperforming, just putting money into an S&P 500 index fund, a bond index fund, something along those lines. Again, it's based on discipline, not emotion, longterm thinking, staying fully investors. This slide really hammers it home. I mean, if you look over this 20 year period from '99 to '18, there's a significant difference between what would have happened if you just kept it fully invested in an index fund versus what the average investor's doing. What this doesn't really show, but Jim did show it, the slide before this is that during the same period of time, a diversified portfolio even did better.

Henry Rinder: Excellent point. Jim, if you can bring it home on the last slide, the S&P 500 performance of the macro and epidemic events.

Jim DiNardo: Yeah. I mean, this talks about all of the events that we've gone through that have had a tremendous amount ... I'll keep using the word uncertainty, have had a tremendous amount of uncertainty. We just didn't understand what the end looked like. I got to be honest, I wasn't around during the Kennedy assassination. So I don't even understand how uncertain that was. But you can look at the five or six below. Then there's also the epidemics. So again, this time is different. It's unique. It's because of the tremendous amount of uncertainty. But at the same time, I think in two, three, four years, we're going to be looking at this and saying, "Remember when we all spent that month of March and April locked up in our basement, where your four year old came through the door crying when you were on a conference call?" And we'll be laughing about it.

Henry Rinder: Definitely those days are coming. I am certain of that. Amanda, do we have any questions from the audience before we wrap up? 

Amanda: Yeah. So we did have a bunch of questions. I'll just ask one. I don't know how common of a question this is, but I think it'd be helpful to have some insight into. So people were wondering if it would actually be better to take their cash out of the bank and then put that into investment funds or gold or shares, which is a little bit of the opposite of what you guys were talking about. But I think there's some concerns about the value of the dollar and if that might be a better direction.

Jim DiNardo: This isn't that. This isn't a financial crisis. So we recommend that clients have some emergency cash in their house. We also recommend that they have emergency cash in a bank. But I've had one client ask, "Should I take $800,000 out and put it in my house?"

I was like, "That is much riskier than a bank defaulting." '08 was a financial crisis. Banks were in trouble. That's why there was a run on the bank. This is not that. So I would just identify what this is, as opposed to using the last recession's entire playbook.

Ted Byer: Yeah, I agree. I think a decision like that is a rash decision. I don't believe in that. Again, you got to have a financial plan. You got to follow the plan. Taking money out of the bank because you're worried about the value of the dollar or putting it into the market or gold or cash, again, it's an emotional decision, not a rational decision. You got to have a plan.

Henry Rinder: Agreed. Frankly, if people feel comfort in diversification and they want to have a little bit of gold at home or on deposits or whatever, that should have been a strategy from the beginning and not a panic response. Amanda, we'll take one more question and that's going to close the webinar.

Amanda: Yeah, sure. So one of the questions that someone had was that they do invest monthly. They have money that they take and they invest monthly in the stock market. I guess it's a little similar to the retirement concept. But is that something that you still recommend that they do or should they stop making those payments until this kind of settles down a little bit?

Ted Byer: I love dollar-cost averaging. I think that's a great idea. That will allow them to participate and buy more when the market is low, like it is now. I love dollar-cost averaging. I mean, that's the whole thought behind 401(k)s where you have a little bit of money taken out of your paycheck every couple of weeks. It goes in and it buys. It's averaged over all the time. So yes, there's some times that the market's higher sometimes, where you buy less. Market's lower when you're buying lower. Wonderful idea.

Jim DiNardo: Stay doing it, please.

Henry Rinder: I know we have a bunch of questions still unanswered and the time is up. So what we will do is we'll distribute the questions to the speakers and we'll try to get back to the listeners and viewers with answers to your question in a short order. First of all, we appreciate your attendance today. I wanted to thank Ted and Jim for doing a terrific job. Also Amanda and Jamie from our marketing team who put this all together for us. They do a fantastic job with that. Thank you again. Be safe, stay healthy.


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