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"Is it OK to panic a little?" and other pandemic-related questions

It's May (didn't know I was a musical nerd, did you?), and while the market has recovered from its initial free-fall in March, there's still a ton of uncertainty in the air. Will we start to recover in the second half of the year, as the CBO is anticipating, or will the economy continue to stumble? We can't know for certain, as always in the motion is the future, and this uncertainty has led to many questions. Here are a few I've heard, and some of the answers I've given. (Of course, this is not my advice to you in particular, dear reader; take it into consideration, but make sure to apply your own particular circumstances!)

I just sold some/all of my retirement stock allocation and invested it in cash and bonds. Is that OK? And what do I do now?

First things first: if you sold in March just in time to miss the spectacular bounce in the wake of the CARES Act rollout and other government interventions, I'm sorry. I get it, and I'm not going to judge you.

That said, I would never recommend selling because of a downturn; if your finances are properly set up, you won't need that money for at least another few years anyway, which is plenty of time for your portfolio to recover, assuming it's set up in line with your risk tolerance and risk capacity. However, if you were panicking, this may be a sign this was not the case; you might consider moving to a more conservative allocation in general, so that you have more of a cushion against this kind of shock.

But having said that, having exited the market is not likely the end of the world. The important thing is to be in the market for the long haul, and that means your next step is to get back in the market. Do I recommend immediately taking all that cash and investing it right now? Not necessarily, no.

Let's ignore the past for a moment -- what you've done or not done is a "sunk cost", as the economists like to say. Hakuna matata, and all that. If someone were to come to me and ask, "hey, I've saved $100,000 into my retirement accounts over the years, but it's all in cash" and ask me what to do, I would lay out two options: invest the cash immediately, or "dollar-cost average" (DCA) over the course of a year (i.e. invest 1/12 of your cash each month), and I would likely recommend the latter.

Now, dollar-cost averaging is worth its own post, but there's an excellent bit of research over at Dollar and Data that runs the numbers on the relative performance of various strategies. The main points are these:

  • From 1960-2018, lump sum investing would have outperformed a 12-month DCA 80% of the time. (The number goes up the longer you DCA.)

  • During this time period, the average underperformance of as 12-month DCA would have been 3.7%.

3.7% is not a big number in this context, and when you're looking at a large amount of cash and the emotions tied up therein, I find that many clients feel it's a reasonable price to pay. For relatively small sums (e.g. annual RSU vests), sure, go ahead and invest it all at once, but for larger ones, I have no problem whatsoever with a 12-month DCA -- especially in high-volatility environments.

Whether or not you DCA, the important thing is to have a plan. Invest all at once. Invest the same amount every month for 12 months. Invest half in the first quarter of GDP growth, and the other half in the second quarter. (I'm not recommending this, just throwing out ideas.) Some kind of plan. Otherwise, you'll sit on the sidelines forever, and that would not be OK!

(Side note to the hypothetical questioner: I wish you'd asked me before you liquidated your assets. I'm not the guy who's just going to say "no" or "stay the course"; we can always figure out a compromise, like ratcheting down your asset allocation to something more conservative.)

I had some cash to invest in March, and I invested it when the market dropped, hoping to "buy the dip". Is that OK?

This is the inverse of the situation I laid out above, and unsurprisingly, my thoughts mirror the ones I've just laid out.

First and foremost: why wasn't the cash already invested? If it's cash you might need for a short-term goal, or it's your emergency savings, then almost always my recommendation is do not invest it! Sure, chances are high that investing will turn out in your favor, but remember: never make a bet you can't afford to lose.

If the answer is that you were "waiting for a good deal"...then I've already given you your answer, repeatedly. Trying to time the market is a loser's game. You're better off being the house than playing blackjack. Again: have a plan, whether it's DCA or something else, but get in. (Another advantage of DCA over other metrics, by the way, is that it's time bound: no matter what happens, you're guaranteed to eventually be in the market, which is the goal!)

And if you were in the process of DCA and decided to accelerate a bit...I probably won't yell at you (as long as it's money that you don't need for short-term goals). However, I would point out that this is an advantage of DCA: because you're investing the same amount of cash either way, when prices go down, you end up buying more, so you're already buying the dip!

I'm worried I might lose my job, and that it might take longer than usual to find a new one. Should I put more money aside for emergency savings?

This is actually the best question so far. I generally recommend 3-6 months of living expenses set aside for an emergency. If you're closer to 3 months and decided to take money you were planning on investing (or putting towards another short-term goal, like the down payment on a house) and pad out your emergency savings to 6 months, I generally would nod and say "fair enough". 3 months extra living expenses in cash generally won't break a long-term financial plan, while running out of cash while searching for a job will.

That said, be aware that there are some other options. For one, you can generally pull your contributions (not earnings!) from a Roth IRA once you've had one for five years -- no tax, no penalty, no nothing. For another, the CARES Act has greatly loosened the restrictions on accessing retirement funds: if you lose your job due to COVID-19, you can generally pull money out of your 401(k) or IRA without penalty, spread the tax consequence over 3 years, and effectively only pay taxes on the withdrawal if you don't put the money back during that time. (Note that there are some limitations and details on this front -- for example, your 401(k) has to offer hardship withdrawals or some other means of in-service distributions.)

So assuming you have at least 3 months of living expenses in your emergency savings, you could just leave them as-is, and pull from your retirement savings if absolutely necessary, as opposed to effectively pulling from them proactively by padding your emergency savings with money that would otherwise be invested.

And yes, if you have a home, it is indeed possible to tap the equity, but COVID has made it significantly harder. Lenders are upping their requirements for cash out refinances, and many banks are outright halting applications for new HELOC's. If you've already got a HELOC, great, but be aware that if for some reason your home declines sharply in value, it may get frozen -- don't rely on that too much!

Obviously the best course of action here depends on your particular situation, but it's good to know the options!

I was thinking of working with a financial planner, but now things are so crazy...does it still make sense?

If you lost your job, then absolutely not: you need to make finding a new one your full-time career and your hobby on top of that! That said, if you have some questions that you think a planner could help with (e.g. you're looking at some of the options I just mentioned), you can probably find one who'd be willing to do some limited work for cheap or free, given the circumstance. (Something like Seaborn's Office Hours might work well here.)

Otherwise, though, I think it absolutely makes sense to start working with a planner. "Until such time as the world ends, we will act as though it intends to spin on." Many aspects of the plan likely won't change much in the light of market downturns or pay cuts, and even if it does, it'll be a "flight plan" that you're just making adjustments to, rather than something that's being rebuilt from scratch.

And sometimes an outside voice is exactly what the doctor ordered: the right balance of caring, impartiality, and expertise to make sure you're pointed in the right direction!

Britton is an engineer-turned-financial-planner in Austin, Texas. As such, he shies away from suits and commissions, and instead tends towards blue jeans, data-driven analysis, and a fee-only approach to financial planning.

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