On September 16, 2021, Sand Hill CIO Brenda Vingiello, CFA joined the CNBC Halftime Report panel once again and discussed what positive catalysts investors canread more
In a Market Downturn, Is Your Current Investment Plan Obsolete?
In just the first half of 2020, investors have faced a multitude of concerns, paramount of which are the health and safety of loved ones and the resiliency of their investment portfolio. It goes without saying that any investor watching the markets decline should rightfully check in on the state of their investment performance and asset allocation. For many who rely on their portfolios for income, your asset allocation was determined by a thorough process of understanding risk tolerance and constructing a sustainable cash flow plan, with the ultimate goal of pinpointing the optimal risk/return balance to meet income needs over the long-term. Major market declines tend to trigger second guessing of investment exposures. It is not a bad thing to question your choices at this moment, but before any permanent changes are made, we recommend a closer examination of your full financial picture.
Revisit the plan from better days. – The first step you should take when contemplating any change is to dust off the most recent cash flow plan and walk through it with your Wealth Manager to discuss the risk, volatility and projected outcomes that were already embedded in the tested scenarios. Regardless of the date of your last cash flow plan, we still feel it provides important information. The real value of cash flow planning, often called Monte Carlo testing, is that the results are based on hundreds or thousands of scenarios that consider taxes, fees, inflation and most importantly, market volatility in the most extreme time periods like 2008. Simplified straight-line calculations, which can be easily coded into a spreadsheet, do not provide a robust set of realistic return scenarios. It is worth revisiting why the current allocation was selected and whether your plan allowed for any wiggle room to reduce risk and therefore potential growth while still covering your needs.
Evaluate your current options. – The options you have in the midst of a market downturn are: 1) exit market-sensitive investment holdings and repurchase them at a later date, 2) stick with the current investment plan or 3) increase purchases of risk assets while prices are depressed. For this exercise, let’s focus on 1 and 2. Intuitively, it might seem less risky to sell in a turbulent market environment, but that could ultimately prove to be the highest risk move. Depending on your previous cash flow plan’s results, selling at depressed prices could lock in a smaller portfolio size, putting more pressure on your portfolio to support your long-term cash flow needs.
Measure the risk of changing the plan. – If your original plan allowed for a reduction in stock exposure without threatening your long-term spending, then shifting to a more conservative portfolio for the duration of the investment time horizon should be explored. Your cash flow plan should be re-tested, with the assumption that your current smaller portfolio is the new starting point. It is important to understand that for some, the move to a conservative portfolio can only be temporary unless it is accompanied by a permanent reduction in spending. Furthermore, an interim move introduces timing risk, which is selling depressed assets and repurchasing appreciated assets, thereby locking in losses and missing out on a rebound.
What we have learned through various selloffs is that market recoveries happen in fits and starts. Often a recovery has long passed when the environment feels safe to invest again. There is nothing wrong with using a real sell-off experience to dial in the most optimal allocation of growth and preservation assets to meet your needs; however, at Sand Hill, we want to make sure your long-term success is not negatively impacted by short-term actions. The cash flow planning we do for our clients requires revisiting, especially in times of market stress, but it is always useful and rarely found to be obsolete. We have found that following these steps allows our clients to make the most informed and sustainable long-term decisions for their future.
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All video presentations discuss certain investment products and/or securities and are being provided for informational purposes only, and should not be considered, and is not, investment, financial planning, tax or legal advice; nor is it a recommendation to buy or sell any securities. Investing in securities involves varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular client’s financial situation or risk tolerance. Past performance is not a guarantee of future returns. Individual performance results will vary. The opinions expressed in the video reflect Sand Hill Global Advisor’s (“SHGA”) or Brenda Vingiello’s (as applicable) views as of the date of the video. Such views are subject to change at any point without notice. Any comments, opinions, or recommendations made by any host or other guest not affiliated with SHGA in this video do not necessarily reflect the views of SHGA, and non-SHGA persons appearing in this video do not fall under the supervisory purview of SHGA. You should not treat any opinion expressed by SHGA or Ms. Vingiello as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of general opinion. Nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based solely on any information provided on this video. There is a risk of loss from an investment in securities, including the risk of loss of principal. Neither SHGA nor Ms. Vingiello guarantees any specific outcome or profit. Any forward-looking statements or forecasts contained in the video are based on assumptions and actual results may vary from any such statements or forecasts. SHGA or one of its employees may have a position in the securities discussed and may purchase or sell such securities from time to time. Some of the information in this video has been obtained from third party sources. While SHGA believes such third-party information is reliable, SHGA does not guarantee its accuracy, timeliness or completeness. SHGA encourages you to consult with a professional financial advisor prior to making any investment decision.