This informational material is provided by U.S. Bank Asset Management Group who provides analysis and research to U.S. Bank and its affiliate U.S. Bancorp Investments. Contact your wealth professional for more details.
Over the past four months, the global economy and capital markets have seen an ongoing series of changes due to the global COVID-19 pandemic.
“The volatile market has led to obstacles for investors, consumers, businesses and governments. Now is a good time to reflect on your personal situation and goals,” said Lisa Erickson, U.S. Bank Asset Management Group. “Planning is a critical step in preparing for whatever comes your way.”
There are three stages during a major economic event – the downward-biased stage, when some investors quickly buy or sell without engaging in deep analysis; the muddle-through or stabilization stage, when it is unclear how an event will ultimately resolve itself; and the growth stage, which is shaped by investors who wait to make decisions based on the longer-term implications.
Currently, Erickson and the Asset Management Group consider the U.S. to be in the muddle-through stage. She emphasizes the importance of taking five actions to protect your portfolio in this time of market ambiguity.
Her advice is to make sure you have a well-defined plan to help ensure investment actions reflect your needs and goals.
“Given today’s fast-changing circumstances and recently enacted pieces of legislation, there are a number of financial planning opportunities that can help solidify both your current and long-term financial situation,” Erickson said.
After reviewing your plan, consider reevaluating risk tolerance and adjusting target asset allocation. Times of market stress can reveal an investor’s true risk tolerance. An adjustment in risk tolerance may also lead to an adjustment in savings and spending plans.
“Once you set up targets, keep working toward those goals,” Erickson said. “You don’t have to invest all in one lump sum. Come up with a systematic plan to invest a specific amount every month. I understand it’s hard to know what to do these days but keep investing.”
According to Erickson, bonds play two important roles in investment portfolios and financial plans. First, they provide a steady source of cash flow into portfolios. Secondly, they can provide some defensive characteristics relative to global stocks, especially higher-quality, longer-maturity bonds. If the bond portfolio has not had enough of this type of exposure, Erickson recommends that investors make a plan to begin a transition in the target bond portfolio to help weather any future economic downturns.
With year-to-date losses across major global stock markets, Erickson says portfolios are likely below our recommended equity exposure. She recommends returning to long-term policy benchmarks in equities, fixed income and real assets. Investors should emphasize yield, cash flow and income but be selective about sources as dividend and distribution cuts remain a potential major risk.
“When people get nervous about the market or have an urgent financial need, they may decide to raise cash and sell some investments,” Erickson said. “However, over time cash is the lowest returning security, and there’s always the risk that you will find it difficult to put it back into the market.”
“Studies show that moving in and out of markets is hard and redeploying cash from the sidelines may be psychologically challenging. Develop a plan based on time or price to reinvest this cash.”
According to Erickson, cash left on the sidelines can undermine the achievement of your financial goals as cash holdings have historically returned less than most other investments and inflation over time. Success in a financial plan is often delivered through time invested in the market, rather than timing the market.
With all of this in mind Erickson says when making investment decisions, you should always go back to your long-term plan.
“Our team expects the market to go through some back and forth price action. There will be some stopping and restarting of economic activity,” she said. “People are starting to understand the new normal, but there’s not a clear resolution to the pandemic yet. Stick to focusing on your long-term portfolio target. Of course, planning is always subject to your particular situation.”
Read up-to-date market information at usbank.com/marketnews.
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