In the turmoil of today’s economy, sound financial planning and asset allocation are ever important, according to Philip Dallman and Michael Klein, managing directors with Baird’s private asset management practice.
The decline of the stock market, where some investors with heavy allocations in equities have seen portfolio declines of more than 50 percent, has demonstrated the need for proper planning and asset allocation.
"The right allocation, even in these types of markets, shouldn’t cause you to make dramatic changes," said Philip Dallman, a managing director with Robert W. Baird & Co.’s private asset management practice.
Dallman and Michael Klein, another managing director in the practice, say investors who are able to maintain a level of separation from the daily and weekly headlines about the declines in the stock market will be best-served.
"For investors who go into these cycles with a predetermined plan on their allocation strategy, you’ve got to keep them focused on that plan because the emotional responses to the media – the constant barrages of interviews with ‘experts,’" Dallman said. "It’s distracting. It’s our job as we see it to keep the client focused on the plan, to keep the general public focused on the recovery of the economy, not the daily fluctuations of the major institutions."
As more investors have fled the public markets for Treasury bonds and other "safe" asset classes in recent months, many investors may have been tempted to change their strategies. But watching the markets too much and changing strategies based on current conditions is like assessing one’s home every day, Klein said.
"The point is to build your plan and pick up your long-term tolerance for risk for cash flow, and then have the ability through proper design to maintain them," he said.
Those who have lost the most in the recent economic downturn have most likely not had a plan or had a defective plan, both Klein and Dallman said, which gave them a high concentration in equities.
"When the markets are going up, people’s appetite for risk increases," Klein said. "They think it will go up infinitely and therefore, stocks no longer become risky."
Retirees with losses
Some portfolios high in equities may have lost more than 50 percent of their value in the last six months. Retirees who have lost that much and are depending on those assets will soon need to make tough choices.
"They’ve been operating on a methodology that I hate to say it, but is a little more akin to gambling," Klein said. "Their tolerance for risk will have to go way up because they are going to have to have the ability to have larger swings while we wait for the economy to recover. Or conversely, they may never have to go back to the market. In which case, they may have to make some very serious lifestyle changes."
Investors looking to make up for losses need to prepare carefully, both Klain and Dallman said.
"The decision they made to get out of the market causes a whole new set of questions," Dallman said. "We caution investors not to react like that in markets like this. If there is a plan in place, you avoid emotional responses."
College savings
Some parents of college-aged teenagers and young adults could face a similar situation if they are using equity-heavy college savings programs such as 529 programs. Many of those programs may have experienced losses in recent months, which could make it difficult to pay costly tuition, room and board and materials costs for college.
"I have a freshman in college and there are a lot of us like that," Dallman said. "The unpredictability of the markets is going to cause issues like this for all of us, and adjustments will have to be made."
Dallman’s college savings plan has a balance of cash, fixed income and equity assets. His family is now using the cash and fixed income assets to pay some of his son’s expenses, and will rebalance their accounts in the future.
Families that have at least five years before their children begin college should remember to balance their asset allocations as their children grow older, Klein said.
"A lesson that should be learned is that when the children are 15, 16, 17 years old, if not a little bit younger, the 100-percent equity accounts should be taken down into more fixed income and cash,” he said. "You need to handle those accounts so by the time they’re walking into college the vast majority of those accounts need to be in cash or fixed income. It’s a little trickier than throwing it all into equities and letting it ride."
Business owners
Because their companies are often their best retirement asset, business owners should not be tempted to sock away money into private retirement programs instead of putting it into their companies, Klein said.
"(The business) is the long-term builder of wealth for their family, it provides their daily and monthly living expenses and it provides for their employees and families as well," Klein said. "We don’t look at it like you have the choice of one or the other. By doing the right thing for your company and keeping the company viable and growing through a period like this, you are doing more saving for retirement than you ever could."
Market recovery
Investors who can take a long-term view of the market have some of the best prospects because of the low prices on many quality, proven companies that have posted steady growth over decades. If investors are still worried about timing, they should ask themselves several basic questions.
"A question we ask ourselves a lot is not about the market and did the market hit the bottom," Klein said. "The question is, ‘Do you think the economy is going to recover?’ If you believe the economy is going to grow out of this, then this could look like a bottom to you."
Young investors who have 30 or more years before they need to draw upon retirement income may be in the best position to capitalize from the state of the markets today, Dallman said.
"If you are a young investor, you may not see an opportunity like this again," he said. "If your own house is in order, we strongly encourage young people to get a plan in place that incorporates their 401(k) plan, your qualified dollars, but also money outside of that."
Klein agreed.
"They can be some of the most aggressive investors out there – it’s about the amount of time they have," he said.
