The Impact of Coronavirus Part 3: Retirees

In this third part of a series on the impact of coronavirus on investors, we explore the challenges (and opportunities) for retirees facing a potential market downturn. In Part 1, we concluded that accumulators have good reason to be optimistic that any market downturn will lead to a more sustained market advance, virtually erasing any evidence of the downturn. After all, it’s happened at least 25 times in the last 100 years. For pre-retirees (Part 2), it’s an opportunity to reassess their assumptions and make the necessary adjustments to stay on course. It could be more challenging for retirees who rely on their investments for lifetime income sufficiency, but there are also opportunities to actually improve their position if they know what to look for.

Managing Your Portfolio for Risk and Opportunities

There’s one principle all investors – accumulators, pre-retirees, and retirees – should follow, and that is they should never stop managing their investments. Regardless of the state of the economy or market, there are always dangers to defend against, and there are always opportunities to seize. When a significant event like coronavirus hits, your plan doesn’t necessarily have to change, but adjustments may be needed based on increased risk or new opportunities. At the very least, such an event warrants a review of your portfolio to uncover either.

For example, a sharp economic downturn could change a company’s fundamentals to the extent it no longer meets your original criteria as a solid, long-term investment. If, based on those fundamental changes, you wouldn’t invest in that company today, you should probably don’t want to continue holding it in your portfolio.

Opportunities to Upgrade Your Portfolio

The good news is the sale of underperforming security frees up cash that can be used to seize a new opportunity. In managing their investments, investors need to be looking on both sides of the market – both the risks and the opportunities. In the recent, sharp downturn, some extremely high-quality companies were discounted significantly for a short time. One example was Disney (NYSE: DIS). This is a company whose stock seemed as if it could only go up over time.

Through its acquisitions of dominant media and entertainment brands, such as ESPN, Marvel Studios, and Star Wars, they have an incredible arsenal of assets that will only grow their revenue. Now, with its Disney Plus streaming services, it’s poised to leave Netflix in the dust. Yet, its stock fell by nearly 50% in the recent downturn. That’s an amazing discount for a high-quality company with otherwise extremely sound fundamentals.

There were other COVID-related reasons Disney’s stock fell so sharply, including the closing of their theme parks and the cancellation of sports, which capped advertising revenues for ESPN. But those are temporary setbacks. You could say that, but for COVID, you might never see an opportunity like Disney again. However, these kinds of opportunities often present themselves in sharp market downturns.

Opportunities to Increase Income

So, swapping poor performing companies for discounted companies with stronger outlooks is one way to upgrade your retirement portfolio – reducing risk while improving long-term returns. But what if the companies in your portfolio are still fundamentally sound, but their stock prices have been caught in the contagion of panic selling? As nerve-racking as it is to watch the value of your portfolio fall, there is no reason to panic. First, a declining market is also an opportunity to purchase additional, discounted shares of fundamentally sound companies to boost long-term performance, especially dividend-paying companies. When you buy dividend stocks at lower prices, your investment earns a higher yield.

Secondly, high quality, well-managed companies always pay their dividends. Many companies have never failed to make a dividend payment, and many of them have never decreased their dividends even as their earnings declined over time. Therefore, if you receive a quarterly dividend payment from any of these companies, it doesn’t matter what happens in the stock market.

For Portfolios with Little or No Dividend Income

For retirees who own stocks that don’t generate dividend income, or who rely on capital gains to supplement their income, a market downturn can be challenging, especially during these times of historically low yields. If you need to sell stocks during a market pullback, you are potentially limiting your lifetime income sufficiency. But there’s still no cause for panic. You just need to be strategic in determining which positions to tap.

Imagine your retirement portfolio as a variety cheesecake with a dozen or so different-flavored slices. Each slice is used differently depending on market conditions. Slices (stocks) that have experienced an increase in value can be sold for distribution, while slices that have experienced a decline in value can be held until their prices recover. In some years, a small portion of each slice might be used for distributions. Each year the cheesecake is rebalanced to maintain a proper allocation while reducing risk.

Of course, we use sophisticated tools to divvy up a portfolio and manage it for optimal income and capital preservation, which includes rebalancing and tax harvesting. The point is you need to be very strategic when there is a need to invade your portfolio principal.

The bottom line, whether you are an accumulator, a pre-retiree, or a retiree, an event such as COVID, does not necessarily require wholesale changes to your plan. While it can impact investors differently, those who have a strategy and the ability to manage it will often find opportunities to offset the setbacks. At a minimum, this is an opportunity for a thorough review of your investment strategy to ensure you are track to meeting your objectives.

You might also find this post helpful: Turning Stock Market Lemons into Lemonade with Tax-Loss Harvesting


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