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The CARES Act, the Markets, and Your Long-Term Financial Plan

SHONE-The-CARES-Act-Markets-Financial-Plan

By the Shone Wealth Management Team

It’s a new month, and a new chapter for the global markets, economy, and policy space. Below, we’re taking a look at some of the most important updates you should know, plus tips to help you capitalize on some of the latest developments.


Key Considerations to Keep in Mind

Over the past two weeks, we have seen some short-term recovery in the markets after a couple of rough patches. But through all types of conditions, it’s always important to maintain a long-term perspective.

Many people often assume that the stock market’s current level offers insight into where it may head in the future. When the Dow hit a record high in February, for instance, there was some speculation in the news media about whether the index had peaked and would inevitably reverse in the coming weeks. When the markets turned out a poor showing in the first few weeks of March, others worried about how much further they would decline until things started to turn around again.

Formulating your investment decisions around predictions about the market’s current level or recent performance is a form of market timing, which will ultimately result in a poor investment experience over the long term. Not only is it extremely difficult to do, timing the market — whether it’s speculating the right time to get in or get out — also can be costly.

Take a look at the chart below, which illustrates the full opportunity cost of missing just a few of the market’s best days:

SHONE-Staying-Invested-Chart

Now take a look at the following chart, which helps us understand the risk of getting in too early. You’ll see that the cost of getting in early, in terms of the break-even time, is much less than the opportunity cost of missing the best days in the market:

The Cost of Being Early vs Being Perfect

SHONE-The-Cost-of-Being-Early-Chart

Source: Bloomberg and GSAM. As of March 31, 2020.

The bottom line is that there is no proven way to time the market, whether that involves pinpointing the best days to invest or getting out of the market to avoid volatile conditions. Staying invested in the market and applying proven tactics, like portfolio rebalancing, is the preferred approach. It’s an approach that we practice at Shone Wealth Management and one that ties into our philosophy of only owning stocks for future cash flow needs. None of the time frames associated with getting into the market early come close to putting that rule in jeopardy.

We can’t predict what lies ahead, and there is a very real possibility that more volatility could be on the way. The most recent period to which we can compare our current state is 2008. Between September 2008 and December 2008, the S&P 500 notched six different rallies of 9% or more; however, as most of us remember, the market then bottomed out in March 2009. It was difficult to stomach, and for many investors, very unpredictable.

Similarly, the COVID-19 pandemic has triggered economic hardship for many Americans across the country. Initial jobless claims spiked from 3.3 million to 6.6 million recently, further underscoring that the economic effects of this crisis will be long-lasting. Though the government has taken a major step in mitigating the impact with the Coronavirus Aid, Relief, and Economic Security (CARES) Act (more on that below), we will likely see more uncertainty until the virus has stopped spreading, and more Americans can go back to work and participate in our local and national economy.

What Should You Keep in Mind?

How can you, as a long-term investor, navigate this uncharted territory with no clear-cut map to tell you what lies around the bend? Here is what we at Shone Wealth Management are doing to help our clients thrive through these uncertain times:

  • Address Asset Allocation Drift Through Rebalancing: The recent volatility presents the perfect opportunity to rebalance your portfolio’s asset allocation back to target so you can increase your chances of capturing higher expected returns while maintaining your desired level of risk. This is a proactive, smart strategy that doesn’t involve timing or stock picking in an attempt to beat the market (a loser’s game). At Shone Wealth Management, we already do this for all of our clients in order to increase their chances of capturing higher returns.

  • Review Your Retirement Plan and Seek Opportunities to Benefit from the CARES Act: As we’ll discuss below, there are a number of provisions in the new legislation that benefit retirees and those who are nearing retirement. One of the biggest components: required minimum distributions (RMDs) have been suspended for IRAs and 401(k) plans.

Above all, remember that a little perspective can go a long way toward improving your long-term investment experience. Bear markets are a normal aspect of the market cycle. Recessions are a normal function of the economy. We have survived poor conditions in the past, and the comeback has often been more memorable than the downturn. Whether the market rebounds, or we face more volatility in the coming weeks, your best strategy is to stay focused on your long-term financial plan and investment goals, and tune out the noise.

The Latest in Policy: Breaking Down the CARES Act

On Friday, March 27, President Donald Trump officially signed into law the bipartisan CARES Act. This $2.2 trillion stimulus package — the largest in US history — is intended to provide economic relief to individuals and businesses affected by the COVID-19 pandemic.

At this point, you’re probably aware of the $1,200 direct payments to individuals, and the funds available to small and large businesses — so today, we wanted to give you a breakdown of some lesser-known provisions that could have a major impact on you and your family:

Small Businesses:

  • Employers will be allowed to delay the payment of their 2020 payroll taxes until 2021 and 2022.

Individuals:

  • Individuals will benefit from a 120-day suspension on evictions for any renters whose landlords have mortgages backed or owned by Fannie Mae, Freddie Mac, and other federal entities. Landlords also can’t charge any fees or penalties for nonpayment of rent during this time.

Unemployment:

  • Self-employed workers — including gig workers, freelancers, and independent contractors — are now eligible for unemployment benefits.
  • Part-time workers who lost their jobs and workers who can’t get to their new jobs because of the pandemic are also eligible for unemployment benefits.
  • Unemployed workers who recently exhausted their benefits are allowed to sign up again.

Retirement:

  • As we stated above, RMDs from IRAs and 401(k) plans are suspended. This provision is intended to stop retirees from being forced to sell investments that have probably decreased in value since the beginning of this pandemic.

  • The 10% early withdrawal penalty for distributions of up to $100,000 for COVID-19-related purposes will be waived. Furthermore, withdrawal taxes can be spread out over three years from the date you took the distribution or rolled back into your account before those three years are up.

  • The bill doubles the 401(k) loan limit from $50,000 to $100,000 for those affected by the pandemic.

  • If you were supposed to finish repaying a 401(k) loan before December 31, you will now get an additional year.

Student Loans:

  • Payments for student loans held by the federal government will be automatically suspended until September 30 without penalty to the borrower.

  • Interest will not accrue on the loan during the suspension period.

Charitable Contributions:

  • Donors can now deduct 100% of cash gifts to a public charity against their 2020 adjusted gross income. The old deduction rules will still apply to cash gifts to private foundations.

While the CARES Act is good news for some businesses and individuals across the country who are struggling, additional legislative measures will likely be proposed soon, and we’ll continue to keep an eye on the federal government’s actions in the weeks to come.

Behind the Scenes

At Shone Wealth Management, we are continually taking action and monitoring a variety of different factors to enhance our clients’ investment experience, in both volatile and smooth market conditions. Every day, we’re having proactive conversations with our clients about current market and economic events, and we’re always seeking ways to take advantage of opportunities when they arise. Some of those opportunities include:

  • Rebalancing your portfolio back to your target allocation or desired level of risk, as mentioned above.
  • Tax-loss harvesting, which allows us to help you stay invested and offset future gains.
  • Reviewing the newly passed CARES Act and helping you take advantage of any provisions available through our personal planning process.

Through good times and bad, you can rely on your Shone Wealth Management team to find the silver lining and maximize your opportunities for long-term success. If you have any questions or simply would like to discuss some of your concerns about our current environment, please contact us by email or by calling (925) 472-0874.


We appreciate and take very seriously the trust you have placed with us.


Sincerely,
Your team at Shone Wealth Management

 

Disclosures:

The S&P 500 is a market capitalization-weighted index that tracks the 500 largest companies listed on the New York Stock Exchange or NASDAQ Composite. It is used as a benchmark of the overall stock market’s performance.

Return data represent past performance and are not indicative of future results. Historical performance does not reflect applicable transaction, management or other applicable fees as noted, the incurrence of which would decrease hypothetical, historical returns.

Source for all charts and text contained within graphics: © 2020 Clearnomics, Inc. All Rights Reserved. The information contained herein is proprietary to Clearnomics and/or its content providers and may not be copied or distributed. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein. All reports, charts and graphics compiled by Clearnomics or any of its affiliated websites, applications or services are issued without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and any commentary for any and all markets should not be construed as a recommendation to buy, sell or hold any security – including mutual funds, exchange traded funds or company stock.

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