This urge to pull money out of investments and move it towards “helping” may also have earmarks of emotional investing. While clients may perceive Wall Street to have less of a bumpy ride in the months to come, their view of Main Street may look like a financial tornado touched down.
Almost everyone almost everywhere is trying to help. The most inspiring stories include the 99-year-old WWII Veteran who raised $17 million for the UK’s National Health Service by walking laps around his garden. And the most mundane may be the couple that continues to order pizza from the mom and pop shop even as they run out of ingredients. For those in the position to help long term, they may want more information from their financial advisors about how and where to direct their investments.
For financial advisors, this can be a long conversation. First, a survey of U.S. Chief Financial Officers recently completed by PwC showed that more than a quarter of them expected layoffs at their company, an uptick of nearly 10% within two weeks. That same survey found that 82% of those CFOs were focused on reducing costs however possible. This may mean bonuses and promised raises for those Good Samaritan clients may not be forthcoming.
Additionally, the hits to the supply chain may mean that companies that promised their employees their jobs were secure at the beginning of the crisis may need to furlough or lay off employees as it becomes harder to manufacturer goods and bring them to market.
Supply chain problems can do more than SNAFU a client’s own personal financial picture. It may mean that financial analysts may have a rough ride predicting how and where supply shortages could impact a company. In other words, shortages may beget shortages in surprising places.
This urge to pull money out of investments and move it towards “helping” may also have earmarks of emotional investing. While clients may perceive Wall Street to have less of a bumpy ride in the months to come, their view of Main Street may look like a financial tornado touched down. And that sense of chaos may have those clients moving money around in a manner similar to how an emotional investor may want to pull money out of a volatile stock market. Explaining the downsides of emotional investing may help clients understand the bigger picture when it comes to long term financial investing.
Still, there are important ways clients can help with the financial crisis aspect of the COVID-19 epidemic. First, clients should speak with their tax advisors about the CARES Act’s new, more favorable rules on charitable contributions. As discussed by Kiplinger, “If you take the standard deduction on your 2020 tax return (the one that you'll file in 2021), you can claim a brand new "above-the-line" deduction of up to $300 for cash donations to charity you make this year…. [and] the CARES Act lifts the 60% of AGI limit for cash donations made in 2020 (although there's still a 100% of AGI limit on all charitable contributions).”
For those clients who want to do more, they may benefit from reviewing key details of impact investing. We covered that topic recently. By way of reminder, “Impact investing is similar to SRI [Socially Responsible Investing] but drills down into investing in specific projects, rather than focusing on funds or stocks…. ‘The point of impact investing is to use money and investment capital for positive social results.’” Many Impact Investing groups are reporting compoundannual growth rates 17%, nudging up against the “good” or “strong” category usually found at 18% to 25%. But, investing in specific projects rather than more diversified projects carries a higher risk and therefore may not be suitable for many investors, especially those nearing retirement.
Clients who may want to pull money out of their traditional investments to invest in local businesses may also be putting crucial assets in too high of a risk category. Those clients may benefit from exploring using some of their income towards microloans via self-directed IRA’s. Again, that investment can be considered high risk. We discussed microloans recently as a potential for refinancing credit card debt and other small loans.
In short, clients who want to help may be able to find ways to protect their retirement without engaging in behavior that’s too high-risk.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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