Hello to our wonderful clients!
Given the continued volatility in the stock market, we wanted to reach out and provide another update. (If you missed our March update, you can check it out here.)
What is happening?
The President has persisted with announcements of significant tariffs on other countries, but has waffled on timing of implementation which has whipsawed markets. Last week, the S&P 500 dropped 11% in two days (which was the 5th largest two day drop in the last 75 years), and yesterday the S&P 500 was up 9.5% (best day in the market in more than 15 years).
The possibility of tariffs continues to put significant upward pressure on inflation and downward pressure on the economy, making a recession more likely.
Why is this so unsettling?
I’m sure you don’t need me to tell you why the turmoil in the markets is unsettling, but to bring a voice to what you might be feeling…
Uncertainty is more stressful than knowing a bad outcome is imminent, and there is a tremendous amount of uncertainty right now.
For many of you, your compensation is directly tied to the performance of a public stock via RSUs, and you might be watching your compensation drop by, potentially, hundreds of thousands of dollars for 2025 depending on how the remainder of the year unfolds.
You may be concerned that you could get laid off amidst an economic downturn.
Although you are likely not in a position of needing to sell equities in a down market, it’s still unsettling to watch your portfolio value drop, and it might feel like you should take action to protect yourself.
The negative news cycle is in overdrive.
You might be feeling added frustration or anger at our current leadership.
What can you do to protect yourself?
Our financial planning and asset management approach is built to weather unexpected periods of volatility like this one. We plan in advance for both Plan A and Plan B, which means that you, our clients, are already set up to make it through difficult periods like this one. Below is a list of some of the ways our planning and asset management approach protects you.
We prioritize building a fully funded Emergency Fund that is not invested in the stock market.
We recommend that funds for upcoming short term goals (home purchase, renovation, etc.) are not in equities, and funds for mid-term goals are in balanced portfolios with significant bond allocations.
For those nearing phased or full financial independence, we recommend a larger cash reserve and higher bond allocation to minimize the possibility of selling equities in a down market.
For those with a child within a couple of years of going off to college, we recommend a higher bond and short term reserve allocation to minimize the possibility of selling equities in a down market within 529s and brokerage accounts earmarked for college.
For clients with significant RSU income, we recommend that only a small portion of your RSU income (if any) is needed to cover expenses, which means that although a market downturn might slow progress on goals temporarily, you’re still in a solid financial position.
We recommend that you have adequate medical, disability, and life insurance so that if you have an unexpected health event, you aren’t likely to need to sell equities at an inopportune time.
Through the planning work we’ve done together, you have a strong understanding of your finances so adjustments can be made if needed.
Periods of volatility can trigger a feeling of wanting to take action to protect yourself and your family, but through the planning work we've done together, you've already taken the most important steps.
Should you get out of the stock market?
In general, the biggest risk when the market goes down is selling positions when they're down (locking in losses) and subsequently missing out on the eventual market recovery (missing out on gains). Knowing that you have a solid financial plan in place and a well-diversified portfolio in alignment with your risk tolerance and time horizon, we generally recommend staying invested.
What else can you do now?
If you are concerned about layoffs, consider increasing your Emergency Fund.
We don’t know how tariffs will play out, and what will actually come to fruition, so we don’t recommend going out and purchasing new cars, new laptops, etc. just in case. That said, if you were already planning a car, tech or furniture purchase in the next few months, moving on that sooner rather than later might be helpful. (To be clear, we don’t recommend buying stuff you wouldn’t have purchased otherwise.)
Harvest tax losses in non-qualified accounts. If we manage assets for you, we’re on it already and check for losses to harvest daily.
If you are in the midst of a portfolio restructuring (from concentrated positions to a more diversified portfolio or from ETFs to a direct-indexed portfolio), this could be a good opportunity to make the transition at a lower tax cost.
Continue to dollar-cost-average into the stock market as planned to take advantage of lower stock prices.
Stay informed, but limit your exposure to news. Lean on trusted news sources that provide as little drama and bias as possible, and limit the amount of time you spend doom scrolling.
What changes should you consider in your portfolio?
In most cases, we don’t recommend any changes. Our asset management approach, whether we manage your portfolio or not, is set up to handle market upheaval in the following ways:
Diversify equity (and bond) holdings across both US and international companies. Although US stocks have broadly outperformed international stocks for many years, this year the international equity market is doing roughly 10% better than the US market.
Rebalance your portfolio regularly. Rebalancing forces the trimming of positions that have grown (selling high) and the purchase of positions that have not been in favor (buying low).
Use bonds to provide protection by sticking with short duration high quality bonds. For bonds, boring = good.
Only consider maintaining concentrated equity positions for “home run” goals that you can afford not to achieve (like very early retirement or a second home), and not for “base hit” goals like retiring in your mid-60s.
Transition your portfolio towards lower equity exposure as you get closer to using your portfolio to fund a goal.
In taxable accounts, harvest tax losses consistently (and, in low income years, consider harvesting capital gains).
Apologies for the length of this email. Believe it or not this is the edited down version. ;)
Cyndi, Miranda and I are here to support you. Please don’t hesitate to reach out if you’d like to connect outside of our regularly scheduled meetings. Otherwise, we’ll see you in Q2.
Best,
Natalie, Cyndi & Miranda
This is being shared for informational and educational purposes only. This is NOT investment advice. Every situation is unique so please consult with a professional about your specific situation to see what makes sense for you.