Covid-19 Update (Part 1): What Moves Can Enhance Asset Management Now?
Topics: Asset allocation, Risk, Interest rates, CDs, Refinancing
Is this the moment we – as investors – have all been preparing for over the last few years? Not exactly, I guess. It’s hard to talk about what to do with your money when survival is a focus. Massive job loss and global health concerns aside, what’s happening in 1) the stock market and 2) the bond market can provide an opportunity for investors, which we cannot ignore.
Basically, now is the time redeploy capital, reassess the risk in your portfolio and optimize your debt via refinancing given today’s low interest rates. But before we address those strategies:
- If you are in need of budgeting assistance, check out our post (How Do I Get Out of Credit Card Debt and Start a Budget?)
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Also, stay tuned in coming days for Part 2, a post with more details on what you can do if you need cash and your emergency funds have dwindled but you’ve managed to save elsewhere. Ok, what to do with our investments now?
The stock market remains crazy volatile, but we weren’t totally unprepared as we wrote in our last post (Why Is Diversification Important for Asset Management?), and the fastest 30% stock market decline in history (22 trading days!) gave us another opportunity to deploy cash and rebalance our portfolio. Stocks remain well off their peaks and valuation is more compelling than we’ve seen in maybe years, so while downside from here wouldn’t be surprising, the upside potential is worth the risk (but still leaving a little cash in the portfolio).
Furthermore, since it’s been more than 10 years since we’ve seen anything like this stock market move, it also allowed me to look at individual investments and re-calibrate risk. Put another way, it helped me note which investments might hold up better than others in a short-term correction. If you’ve not run this analysis on your portfolio, you should look at the recent highs and lows for your holdings, both of which were most likely hit in the span of about a month. And most asset classes did it in the same time frame (maybe not the commodity group). So, this pullback was a great opportunity to reassess portfolio risk.
Now let’s talk about bond markets. The opportunity isn’t to grab bonds at a great discount. I believe it’s a favorable time to borrow or refinance, depending on who or what is repaying your debt. A tenant or a cash-flowing business? You can borrow for 30 years at 5% - maybe lower for residential cash-flowing rental real estate! Even if you’re not into borrowing for investment, you might at least consider refinancing your house. Sub-4% interest rates are compelling to lock in for the next 30 years, or if you’ve read my stuff, you know I’m in favor of moving from a 30-year to a 15-year for the mortgage on your primary residence. With still attractive real estate values (for the time being – is it me or does it feel like we’re shifting to a buyer’s market? Hope so!), you could most likely use the equity in your home. The process could lower your interest rate, reduce your overall interest paid, cut your borrowing time down by years and maybe even lower your payment! Think about it! Again, all this predicated on how good you feel about your job prospects right now obviously.
Speaking of debt, there’s a lot of discussion about being debt-free, but I need to rant about interest rates. Fixed income or bonds or CDs provide you an opportunity to lend money to a government or company or bank. This asset class is necessary to your allocation to provide diversification or more importantly short-term liquidity, but it can’t support retirement. You can’t grow your asset base with these instruments like you used to.
Remember when your uncle would give you a “savings bond” worth $25 but if you held onto for 7 years it would be worth $50? That’s like a 10% interest rate! Yes, there were double-digit interest rates for mortgages “back in the day”, but you could have locked in long-term rates of 8% or 10% or 12% or more! As interest rates declined (basically over my lifetime), today’s retirees could have saved “risk-free” with the U.S. government to fund their retirement.
Well that’s not happening now. Prices for this asset class move inversely with interest rates, so as rates go down prices go up, and vice-versa. And rates just went down. Like all the way down. The Federal Funds rate was just reduced to a range to 0.0%-0.25% and this key rate dictates the rate level for bond prices. So, rates aren’t going lower (probably), and if rates can only go up, prices can only come down. I would argue that if you have a multi-decade outlook on retirement and can weather a stock market storm like we’ve seen, there is a modest need for fixed income in a portfolio focused on long-term growth (beyond providing liquidity for your emergency savings). If you need income today, that’s a different story, and I would still look elsewhere besides bonds.
Given the likelihood of higher rates (at some point), you should not be locking up money for the long-term. As I’m writing this, I’m seeing large bank CD rates of 1.0% for a year! Even more hilarious is that the same bank offers you 0.9% for 3 years! So less rate for more term – LOL! I’d rather you literally stuff your cash under your mattress. Yes, you lose to inflation but having access to your money is much better than locking it up for any significant time period currently at these terrible rates. Yes, CDs can have a strategic use, but don’t mindlessly let them rollover at this point.
Your cash must sit somewhere, so definitely make sure your Emergency Savings is funded (3-6 months of expenses), and you should be less interested in the interest rate on this account, and more concerned about accessibility. Still, you should be making 1-2% (in a Money Market account). Any cash beyond your emergency fund should be used for longer-term investments or debt reduction (to an extent: credit cards, student loans). See our blog (Should I Pay Off My Mortgage Early?) to know how I feel about using debt as a tool.
In closing, after the initial uncertainty, if the biggest change in your life is that you wash your hands a little more frequently and stand 6’ away from neighbors as you talk to them, now is a good time to take advantage of the markets, to reevaluate risk as a stock investor and consider optimizing your borrowing as part of your long-term Financial Plan.
Please check out my blog posts for more financial topics:
Best wishes on your financial path!
This post was created by Matt Beeby, the Founder of MHB Advisory Services. Matt has been working in Financial Services and investing in real estate since 2005, though his investment experience spans nearly two decades. He is a Christ follower, active in both his church and his neighborhood association. Matt enjoys sports and family time. Read more about Matt on his website bio.
- Information contained in this document is for informational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any product or security.
- This information is believed to be accurate and should not be considered tax or legal advice.
- Please consult tax or legal professionals for such advice and be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed.
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